If the expected inflation is 100% and the real required rate of return is 6%, the nominal interest rate according to the exact form of the Fisher effect is closest to: A) 12.0%. B) 112.0%. C) 6.0%.
Hint: (1 + Nominal interest rate) = (1 + real interest rate) × (1 + inflation rate)
The correct answer was A. According to the Fisher effect, the relationship between the nominal interest rate and the real interest rate and the expected inflation rate is (1 + r) = (1 + real r)[1 + E(i)]; therefore, the problem yields 1 + r = (1.06)(2) = 2.12, or r = 112%.
Am I missing something? How is the answer A?
According to the Fisher effect, (1 + Nominal interest rate) = (1 + real interest rate) × (1 + inflation rate). Therefore, to compute the nominal interest rate: (1 + nominal) = (1.06)(2) (1 + nominal) = 2.12 (2.12 - 1) x 100 = 112%
Answer is B
B A is just a distractor to make you think that you didn’t subtract 1.
Ok, that’s what I thought
If you go simply for the linear approximation, you know it has to be more than 100%. That makes B the only possible answer.
Exactly what the above posts say. The correct answer is B, which is 112%, don’t forget to subtract 1 and multiply by 100 to get the %. My Bad.
map1 Wrote: ------------------------------------------------------- > If you go simply for the linear approximation, you > know it has to be more than 100%. That makes B the > only possible answer. Good point. That’s exactly how I approached this problem.
[[(1.06)(2)] - 1]*100 = 112% = B