Question

What would you expect the nominal rate of interest to be if the real rate is 4.4 percent and the expected inflation rate is 7.5 ​percent?

Answer 1

Answer:

Nominal Interest rate=11.9%

Step-by-step explanations:

The Fisher effect is a theory propounded by an economist named Irving Fisher.

Fisher's equation shows the relationship between real Interest rate, expected inflation rate and nominal Interest rate.

It can be calculated by subtracting the expected inflation rate from the nominal Interest rate to give the real Interest rate.

Real Interest rate= nominal Interest rate - expected inflation rate

Given,

Real Interest rate= 4.4%=0.044

Expected inflation rate=7.5%=0.075

Nominal Interest rate=?

Therefore,

Real Interest rate=nominal Interest rate - expected inflation rate

Nominal Interest rate=Real Interest rate+expected inflation rate

Nominal Interest rate=0.044+0.075

Nominal Interest rate=0.119

Nominal Interest rate=11.9%