You have an estimate of 1.2% for the real rate of return in the economy and...

You have an estimate of 1.2% for the real rate of return in the economy and an inflation prediction of 2.2%. According to the Fisher Effect, what is the estimated nominal rate of interest for this economy? (You may provide just the approximate estimated rate. You may also include the full estimate for a bonus point.)

Expert Solution

Full estimate:

Based onFischer Relation,

(1 + Nominal rate) = (1 + Real Rate) * (1 + Inflation)

(1 + Nominal rate) = (1 + 1.2%) * (1 + 2.2%)

1 + Nominal rate = 1.0343

Nominal Rate = 0.0343 = 3.43%

Approximate Estimate:

Nominal rate = real Rate + Inflatuon

Nominal rate = 1.2% + 2.2% = 3.4%

jeff jeffy answered 2 years ago

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