Question

A. Explain the various ways that financial intermediaries increase the efficiency of an economy.

B. What is the difference between the Fisher Equation and the Fisher Effect?

C. If money supply growth causes inflation, how will this impact upon the Fisher Effect, quantity of bonds and the interest rates?

Answer 1

A. financial intermediaries are increasing the efficiency of an economy by providing adequate liquidity and credit control quality along with there is an optimum disclosure norm and it is also helping in implementation of the monetary policy of the central bank.

Hence it can be said that financial intermediaries are helpful in smooth functioning of the economy by providing adequate liquidity and support through various market sectors.

B. Fisher equation is the representative of general equation that nominal interest rate is the combination of the real interest rates and inflation in the economy whereas fisher effect will be reflecting that and the prices are going down and it will mean that the interest rates are going up, and if the prices are going up interest rates are going down.

Hence, these are different phenomena of fisher equation which will be implicating that real interest rate is the difference between the inflation rate and nominal interest rates whereas fisher effect is representative of the prices and interest rates

C. Money supply would be impacting the the fisher effect because when the money supply will be going up it will mean that the nominal interest rate is going up in the economy and real interest rate is not going up in the economy and it is due to the inflation rates which is going up in the economy which is driving up the nominal interest rates so it is impacting the fisher effect. It will also drive up the prices and inflation.