Question

Inflation Rate	Real Interest Rate	Nominal Interest Rate
___%	4%	7%
3%	____%	6%
2%	4%	____%

Use the Fisher equation to fill in the blanks in the following table.

Answer 1

Fisher equation describes the relationship between Nominal interest rate and Real Interest rate under the effect of Inflation.

The exact fisher equation is :

( 1 + i ) = ( 1 + r) (1 + π )

Where π= Inflation rate

r = real Interest rate

i = nominal interest rate

However,for calculation the approximate formula can be used which is;

i ≈ r + π

Thus,he above Question can be solved by using the above mentioned approximate formula

Therefore,

1. In first row, We have to find inflation rate

From the approximate formula;

π = i - r

π = 7% - 4% = 3%

2. In second row, real Interest rate can be Calculate as;

r ≈ i - π

≈ 6% -3% = 3%

3. In third row, Nominal Interest rate can be calculated as;

i ≈ r + π

≈ 4% + 2% ≈ 6%