Pursuant to the Fisher effect, the nominal rate of interest is 5.00%, the inflation rate is 2.00% and the real rate of interest is [blank].

Question

Quizplus · Accepted Answer

The Fisher effect formula is: nominal interest rate = real interest rate + inflation rate, or rearranged to find the real interest rate: real interest rate = nominal interest rate - inflation rate. However, for precise calculation, the formula is (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Using the given nominal rate of 5% (or 0.05) and inflation rate of 2% (or 0.02), the calculation is 1.05 = (1 + real rate) * 1.02. Solving for the real rate gives approximately 2.94%.

Pursuant to the Fisher Effect, the Nominal Rate of Interest