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Nominal rate and Fisher effect

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According to the Fisher effect, if the real interest rate is 3 percent and the nominal interest rate is 8 percent, what rate of inflation is the financial marketplace expecting? Explain the reasoning behind your answer. If the nominal rate rises to 11 percent and following the Fisher effect, what would you conclude about the expected inflation rate? And the real interest rate?

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This solution is comprised of a detailed explanation of the Fisher effect and interest rates.

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If the real interest rate is 3% and the nominal interest rate is 8% then in this situation the inflation rate is 8%-3%=5%. This is because the nominal interest ...

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  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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