According to the domestic Fisher effect, if the inflation rate is 5%, and the nominal rate of interest is 7%, the real rate of interest is

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Quizplus · Accepted Answer

The domestic Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, the real interest rate can be calculated as 7% - 5% = 2%. However, this nominal interest rate must be adjusted for compounding, which is done with the following formula: (1 + nominal rate) / (1 + inflation rate) - 1. Plugging in the numbers, we get (1 + 0.07) / (1 + 0.05) - 1 = 0.01904, or 1.904%.

According to the Domestic Fisher Effect, If the Inflation Rate