In: Economics
Given the nominal interest rate of
14%
and the expected inflation of
11%,
then the value of the real interest rate is
nothing%.
With the real interest rate equal to
6%
and the expected inflation equal to
3%,
then the value of the nominal interest rate is
nothing%.
A lender prefers a
▼
higher
lower
real interest rate while a borrower prefers a
▼
lower
higher
real interest rate.
ANS)
Given the nominal interest rate of
14%
and the expected inflation of
11%
We know the Fisher effect that explain the relation between nominal interest rate , real interest rate and expected inflation
nominal interest rate = real interest rate + expected inflation
14% = real interest rate+ 11%
real interest rate = 14% - 11%
real interest rate = 3%
hence the value of the real interest rate is 3%
also, given
the real interest rate equal to
6%
and the expected inflation equal to
3%
We know the Fisher effect that explain the relation between nominal interest rate , real interest rate and expected inflation
nominal interest rate = real interest rate + expected inflation
nominal interest rate = 6% + 3% = 9%
nominal interest rate = 9%
hence, the value of the nominal interest rate is 9%
A lender prefers a higher real interest rate because at higher real interest there will be an higher interest income on lended money.
while a borrower prefers a lower real interest rate because lower real interest the borrower has to pay a high payment on borrowed money.