Question

Suppose the real interest rate is 4% and expected inflation is 1% . What is the nominal interest rate? nominal interest rate: % All else equal, if inflation decreases by 0.5% what will happen to the nominal interest rate? The real interest rate will increase by 0.5% . The nominal interest rate will decrease by 0.5% . The real interest rate will decrease by 0.5% . The nominal interest rate will increase by 0.5% . What do economists call the relationship between the nominal interest rate and the inflation rate? shoeleather costs Fisher effect Taylor rule Leontief paradox

Answer 1

Answer:

a.- correct option:  The nominal interest rate will decrease by 0.5%

b.- correct option: Fisher effect

Explanation:

nominal rate - inflation = real rate

n - 1% = 4%

nominal = 5%

if inflation decrease to 0.5%

then:

nominal: 4% + 0.5% = 4.5%

correct option:  The nominal interest rate will decrease by 0.5%

Fisher formula for real rate:

$\\(1+r_r)(1+\delta)=(1+r_n)\\\frac{(1+r_n)}{(1+\delta)} -1 = r_r$