The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation. Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Question

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Answer 1

Question

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

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Students have asked these similar questions

Which of the following is true about Interest Rate? i. The Fisher Effect illustrates the positive relationship between inflation and nominal interest rates. ii. APR will always be greater than the EAR. iii. We can find the nominal interest rate by adding the default and maturity premiums to the sum of the real rate and inflation. O A. ii and i only O B. i and ii only OC. i only O D. i, ii, and iii

The Fisher equation states that - Group of answer choices A) the real interest rate equals the nominal interest rate less the expected rate of inflation. B) the nominal interest rate equals the real interest rate plus the expected rate of inflation. C) the nominal interest rate equals the real interest rate less the expected rate of inflation. D) both A and B of the above are true. E) both A and C of the above are true.

Identify the correct mathematical expression for the relationship between nominal interest rates and real interest rates. (R denotes the nominal rate of return, r denotes the real rate of return, and h denotes the inflation rate.) Multiple choice question. R = r + h (1 + R) = (1 + r) × (1 + h) (1 + h) = (1 + R) × (1 + r) (1 + r) = (1 + R) × (1 + h)

Answer 2

Question

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

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Answer 3

Question

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

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Answer 4

Question

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

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Answer 5

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

Answer 6

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

Answer 7

Chapter 5, Problem 1PS

Summary Introduction

To calculate: The increase in the inflation rate from 3% to 5% results in the fall of real rate of interest by using the Fisher equation.

Introduction: The interest rate which doesn’t consider any inflation is called as nominal interest rate while consideration of the inflation by the interest rate is called as real interest rate and this consideration reflects in the investment of the investor.

Answer 8

Expert Solution & Answer

Answer to Problem 1PS

The fisher equation implies that the increment in the inflation rate from 3% to 5% can cause the fall of the real rate of the interest.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Fisher equation is used to represent the relationship between the nominal interest rate, real interest rate and the inflation rate. This relation can be given as −

i=r+π

Where,

i = nominal interest rate

r = real interest rate

π = inflation rate

Given that, inflation rate is increasedform 3% to 5%. Then the increase in total inflation rate is 2%. As, there is no change in the real rate hence the nominal rate is increased by 2%.

Any change in the real rate of interest may result in the increment in the expected inflation rate. The situation of the increment in inflation rate results in the decrement of real rate is possible when the nominal rate is remaining constant while inflation rate is increasing. This kind of the situation is not very good situation.

Answer 12

Ch. 5 - Prob. 1PS Ch. 5 - Prob. 2PS Ch. 5 - Prob. 3PS Ch. 5 - Prob. 4PS Ch. 5 - Prob. 5PS Ch. 5 - Prob. 6PS Ch. 5 - Prob. 7PS Ch. 5 - Prob. 8PS Ch. 5 - Prob. 9PS Ch. 5 - Prob. 10PS

Concept explainers

Answer to Problem 1PS

Explanation of Solution

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Chapter 5 Solutions