Problem

The two-year interest rate is 10% and the expected annual inflation rate is 5%.a. What is...

The two-year interest rate is 10% and the expected annual inflation rate is 5%.

a. What is the expected real interest rate?


b. If the expected rate of inflation suddenly rises to 7%, what does Fisher’s theory say about how the real interest rate will change? What about the nominal rate?

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Solutions For Problems in Chapter 3