Question

5. What are the implications of the Fisher Effect? (a) In the long run, nominal interest rates are only determined by inflation rates. b) Domestic policy cannot affect the real interest rate. (c) There is only one unique real interest rate in the world. (d) All of the above 6. In 2009, U.S. liabilities were dollar-denominated corporate and official debt for the most while U.S. external assets were mostly equities, bank loans, government debt, and foreign direct investment, denominated in foreign currencies. When the dollar fell in the wake of the financial crisis, what net effect was there on U.S. external wealth? (a) No change occurred because the change in currency value affects everything equally (b) External wealth rose since the value of liabilities was already in dollars and changed little, but assets denominated in foreign currencies increased in value (c) External wealth declined since the dollar fell and US assets were not worth as much d) External wealth declined since the weak dollar forced the US to default on loans

Answer 1

1. A

Fisher equation establishes a realtionship between nominal, real interest rate and inflation.

r = i - π is the fisher equation.

Fisher phenomena appears in the long run predominantly. This is because the nominal interest rates are set considering the expected inflation rates. So nominal rates do not jump immidiately when inlfation rate changes but take time to stabilize. Over time, however, the nominal interest rate adjust to match up with the new expected rates of inflation.