Homework Answers
Fisher equation States that Real interest rate is equal to Nominal interest rate minus inflation.
Real interest rate takes into account the inflation condition also.
So
Inflation = Nominal interest rate - real interest rate
7-3=4%.
Real interest rate = Nominal rate - inflation
6-4=2%
Nominal interest rate= Real interest + inflation
3+2=5%
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points.
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+ 1/2(Output gap)
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Use the following Taylor rule to calculate what would happen to
the real interest rate if inflation increased by 7 percentage
points.
Target federal funds rate
= Natural rate of interest + Current inflation + 1/2(Inflation gap)
+ 1/2(Output gap)
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The following questions are related to the Fisher effect. a. To demonstrate your understanding of the Fisher effect, complete the following table. Real Interest Rate Nominal Interest Rate Inflation Rate 3% 10% 2%
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