Question

According to the Fisher Model, what are the key determinants of the real rate of interest? Suppose that the average rate of time preference among economic units increases (i.e. increased preference for current consumption). Use the Fisher model to illustrate how this change would affect the interest rate and the amount of investment in a closed exonomy. What would happen to current vs future productuction (and consumption)?

Answer 1

The real interest is the rate of interest, saver or lender receives after allowing for inflation. It can be described more formally by the fisher equation, which states that the real interest rate is appropriately the nominal interest rate minus the inflation

THE INTEREST RATE DETERMINED by three forces

1. Feral rserve : This eeffects short-term and variable interest rate.

2. Investor demand : affecaffects log -term and fixed iinterest rate.

3. The basking industry : they offers loans.

IIllustration of fisher model effects the state that in response to a change in the money supply the nominal interest rate changes in tandem with changes in the inflation rate is the ling run.

Fishermodel is a pphenomenonthat appears in the ling run but that may not be present in the short run.

TheThe fisher effect, its crucial tto understandthe concepts of nominal and real interest rate because fisher effect indicates that the real interest rate equals the nominal interest rate less the expected rate fall as inflation increase unless nominal rate increase at the same rate as inflation.

CURRENT VS FUTURE PRODUCTION (AND CONSUMPTION )

In current production, consumer consum all his current income today and all his future income in the future by saving the consumer give up consumption today for.