Question

In: Economics

Given the nominal interest rate of 14​% and the expected inflation of 11​%, then the value...

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.

Solutions

Expert Solution

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.


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