Question

The Fisher Effect equation can be used to determine the real interest rate. Use this equation to determine the answer to the question. If the nominal interest rate is 0.1100.110 , and the inflation rate is 0.0250.025 , what is the real interest rate

Answer 1

0.075%

Step-by-step explanation:

Interest rate is the rate earned on deposits or the rate charged on loans.

Interest rate could be real or nominal

Nominal interest rate is real interest rate plus inflation rate

Real interest rate is interest rate that has been adjusted for inflation

Fisher effect equation : ( 1 + nominal interest rate) = (1 + real interest rate) x (1 + inflation rate)

(1 + 0.001) = (1 + real interest rate) x (1 + 0.00025)

1.001 = (1 + real interest rate) x (1.00025)

1.001 / (1.00025) = (1 + real interest rate)

1.00075 = (1 + real interest rate)

real interest rate = 1.00075 - 1

= 0.00075 = 0.075%