Question 5 [10 points] If inflation rises from 6 to 8 percent, what happens to real...
Question 5 [10 points]
If inflation rises from 6 to 8 percent, what happens to real and nominal interest rates according to the Fisher effect?
Homework Answers
Real interest rate is calculated after considering inflation ,but nominal interest rate is calculated before taking inflation.
Real interest rate = Nominal interest rate - inflation rate
As per fisher effect nominal interest rate increases by 2% , but real interest rate remain constant.
Fisher expresses the relationship between nominal and real interest rate
fisher equation = i = r +Π
as per fisher law there is one to one relationship between the inflation rate and nominal interest rate.
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