According to the Fisher Model, what are the key determinants of the real rate of interest?...

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)?

Solutions

Expert Solution

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.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

According to the Fisher model, what are the key determinants of the real rate of interest?...

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 economy. What would happen to current vs. future production (and consumption)?

1. According to the IS–LM model, what happens in the short run to the interest rate,...

1. According to the IS–LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph. a. The central bank decreases the money supply. Effect of the shock: Interest rate: Income: Consumption: Investment: b. The government increases government purchases and taxes. The increase in taxes is twice as big as the increase in government purchases. Effect of the shock: Interest rate: Income: Consumption: Investment:

What is the real rate of interest? Differentiate it from the nominal rate of interest for...

What is the real rate of interest? Differentiate it from the nominal rate of interest for the risk-free asset, a 3-month U.S. Treasury Bill.

Define interest rate and explain the different types of interest rate. Discuss the Fisher Equation and...

Define interest rate and explain the different types of interest rate. Discuss the Fisher Equation and explain its application in the business world. Define money, explain the different types of money and discuss the measure of money. Do you think we are better both using smart money(cash less) in today dire time. Define inflation, explain the different types of inflation and discuss the curse of inflation. Which of them is or will more likely become a reality in our time...

18. Using the Fisher Equation, compute the real rate of return if the nominal rate is...

18. Using the Fisher Equation, compute the real rate of return if the nominal rate is 120 percent and inflation is 100 percent. Group of answer choices a. 30 % b. 20 % c. 10 % d. zero percent

Problem 4-18 Determinants of Interest Rates The real risk-free rate is 4%. Inflation is expected to...

Problem 4-18 Determinants of Interest Rates The real risk-free rate is 4%. Inflation is expected to be 2% this year, 3% next year, and then 5.5% thereafter. The maturity risk premium is estimated to be 0.0007 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Round your answer to two decimal places. _____%

If the nominal interest rate is 5% in 2019, what is the real interest rate using...

If the nominal interest rate is 5% in 2019, what is the real interest rate using the inflation rate between 2018 and 2019?

What is the distinction between the nominal interest rate and the real interest rate? 4. In a...

What is the distinction between the nominal interest rate and the real interest rate? 4. In a diagram, show the effect on the real interest rate and amount of investment if people’s disposable income increases. 5. Explain how a government budget deficit affects the market for loanable funds. What is the effect on investment? Ignore the possibility of a Ricardo-Barro effect. 6. Before there is any international trade or international lending and borrowing, suppose the world real interest rate is less than the...

The nominal rate of interest is 7% and the real rate of interest is 3%. What is the expected inflation rate?

If the nominal rate of interest is 13.02% and the real rate of interest is 8.01%, what is the expected rate of inflation?

Subjects