Assume that the nominal interest rate is 8% in 2020, with inflation at 3%. a. According to the Fisher effect, what will happen to the nominal interest rate if inflation goes to 8%? b. If someone borrowed $1 million in 2020 at 8% (promising to pay $1,080,000 in one year) and paid back the loan one year later when inflation had unexpectedly gone to 8%, what would be the real interest rate on this loan?
Assume that the nominal interest rate is 8% in 2020, with inflation at 3%. a. According to the Fisher effect, what will happen to the nominal interest rate if inflation goes to 8%? b. If someone borrowed $1 million in 2020 at 8% (promising to pay $1,080,000 in one year) and paid back the loan one year later when inflation had unexpectedly gone to 8%, what would be the real interest rate on this loan?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Assume that the nominal interest rate is 8% in 2020, with inflation at 3%.
a. According to the Fisher effect, what will happen to the nominal interest rate if inflation goes to 8%?
b. If someone borrowed $1 million in 2020 at 8% (promising to pay $1,080,000 in one year) and paid back the loan one year later when inflation had unexpectedly gone to 8%, what would be the real interest rate on this loan?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education