Question

You are given the following information about the economy: the nominal interest rate = 8%; the real rate of interest -6%.The inflation premium is Η Ο Ο Ο Ο

Answer 1

As per fisher equation -

i = r + Π

i denotes nominal interest , r denotes real interest rate and Π denotes inflation premium.

Hence-

8 % =6 % + Π

Π= 2 %

Here inflation premium is 2%

Fisher explain the relationship between nominal and real interest rates under inflation.this equation predict both interest rate behaviour.

Real interest rates can be calculated after deducting inflation rate into the nominal interest rates.it does not include inflation.

Nominal interest rates calculate after adding inflation into real interest rate.hence nominal inclued inflation