Question

(a) Suppose that the Fisher hypothesis holds for an economy that has an expected real
interest rate r of 2%. For each of the expected inflation rates πe of 2, 4, 6, 8, and 10%,
calculate the nominal interest rate i and the after-tax expected real interest rate ia if a tax
rate t of 20% is imposed on the nominal interest rates.
(b) Discuss the possible societal effects of taxes on nominal interest rates.

Answer 1

formula for fisher equation is,

(1+nominal interest rates)= (1+ real interest rates) * (1+inflation rate)

so, if put the values in the formula

1.If the inflation rate is 2%

(1+ nominal rate)=(1+.02)*(1+.02)

Nominal rate=4.4%

inflation rate is 4% ,Nominal rate = 8.16%

inflation rate is 6%,Nominal rate=12.36%

inflation is 8%,Nominal rate=16.64%

inflation is 10%,Nominal rate=21%