Fisher Equation

Question 1

Fisher Effect

Answer 1

When expected inflation rises, interest rates will rise.

Question 2

Fisher Equation

Answer 2

(1+NR)=(1+RR)*(1+PIexp)
NR=nominal interest rate
RR=real interest rate
PIexp=expected inflation rate

Question 3

How to find real interest rate

Answer 3

Precise Equation: RR= (1+NR) / (1+PIexp) -1
Approx: RR approx NR- PIexp
David calculated 9.4% nominal interest rate, the rate of inflation rate has been 4.2% over the past year
Approx: 9.4-4.2= 5.2% 0.094-0.042= 0.052
Precise: 4.9% 0.0499

Question 4

How to find nominal interest rate

Answer 4

Precise: NR=PIexp+RR+RRPIexp
Approx: NR appox PIexp+RR
David is searching for a real return of 4.7%, where he expects inflation to be 1.3%
0.013+0.047=0.060
Precise: 0.013+0.047+0.0470.013=0.060+0.0006=0.0606

Question 5

Nominal Interest Rate

Answer 5

Inflation + Real Interest Rate= Nominal Interest Rate