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 [blank].

Question

Quizplus · Accepted Answer

The domestic Fisher effect formula states that the real interest rate equals the nominal interest rate minus the inflation rate, adjusted for the interaction between the two. The formula is (1 + nominal rate) / (1 + inflation rate) - 1. Using the given rates, (1 + 0.07) / (1 + 0.05) - 1 = 0.01904 or 1.904%.

According to the Domestic Fisher Effect, If the Inflation Rate