The twoyear interest rate is 122 and the expected annual inf

The two-year interest rate is 12.2% and the expected annual inflation rate is 6.1%. a.What is the expected real interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected real interest rate % b-1. If the expected rate of inflation suddenly rises to 8.1%, what does Fisher’s theory say about how the real interest rate will change? Real rate does not change Real rate increases Real rate decreases b-3. If the expected rate of inflation suddenly rises to 8.1%, what will be the new nominal rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Nominal rate %

Solution

The Nominal interest rate is 12.2%

Real Interest Rate= [(1+Nominal Rate)/(1+Inflation Rate)]-1= (1.122/1.061)-1 = 5.749%

International Fischer Effect says that Real Interest Rates are same across the globe.If Inflation Rate increases then Nominal Rate increases but the Real Rate remains the same. So the real rate does not change.

Nominal Rate=[(1+Real Interest Rate)*(1+Inflation Rate)]-1 = (1.05749*1.081)-1 =14.31%