Assume the nominal rate was 11.50% and the inflation rate was 3%. Using the Fisher Effect, what was the real rate?
Question
Assume the nominal rate was 11.50% and the inflation rate was 3%. Using the Fisher Effect, what was the real rate?
Solution
The Fisher Effect is an economic theory that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, to calculate the real interest rate, we use the formula:
Real Interest Rate = Nominal Interest Rate - Inflation Rate
Given in the problem, the nominal rate is 11.50% and the inflation rate is 3%.
Substitute these values into the formula:
Real Interest Rate = 11.50% - 3% = 8.50%
So, the real interest rate is 8.50%.
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