If the nominal interest rate is 7% p.a and the real rate of interest is 4% p.a, the expected inflation rate will be approximately

Question

BlackTom AI · Accepted Answer

To tackle the question, I first remind myself of the relationship between nominal rate, real rate, and inflation. The Fisher equation in its approximate form says: nominal rate ≈ real rate + expected inflation. This gives us a straightforward way to estimate inflation when the other two values are known.
Option a: 1%. If inflation were 1%, then the approximate nominal rate would be 4% (real) + 1% (inflation) = 5%, which is not equal to the given nominal rate of 7%. This makes 1% an inconsistent choice under the Fisher relation.
Option b: 4%. If inflation were 4%, the approximate nominal rate would be 4% + 4% = 8%. That would overshoot the given nominal rate by about 1 percentage point, so 4% is not the correct inflation estimate here.
Option c: 3%. If inflation is 3%, the approximate nominal rate would be 4% + 3% = 7%, which matches the given nominal rate exactly in the approximate Fisher relation. This makes 3% a consistent and reasonable estimate for expected inflation in this context.
Option d: 11%. If inflation were 11%, the approximate nominal rate would be 4% + 11% = 15%, far from the stated 7%. This would be a clearly inaccurate inflation rate given the provided rates.
In summary, applying the approximate Fisher equation shows that only 3% inflation aligns with a 7% nominal rate when the real rate is 4%. The other options fail to satisfy the basic relationship between these three variables.

MCD2170 - T3 - 2025 Pre-Class Quiz Week 1

If the nominal interest rate is 7% p.a and the real rate of interest is 4% p.a, the expected inflation rate will be approximately

View Explanation

Log in for full answers

Similar Questions

Now assume that 𝑟 ¯ = 1 % and 𝜋 ¯ = 2.5 % . Using your answer from the previous question, you know that the nominal interest rate 𝑖 𝑡 = 𝑅 𝑡 + 𝜋 𝑡 is ______ percent. Use the policy rule and the Fischer equation to answer this question.

Using the Fisher equation, calculate the nominal interest rate 𝑖 𝑡 (in percent). Round your answer to the nearest tenth of a percent.

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will be:

Which of the following are correct expressions of the Fisher equation? (Select all that apply)

If the real interest rate is 4% p.a, and the expected inflation rate is 2%, what would approximately be the annual nominal interest rate?

Which of the following are correct expressions of the Fisher equation? (Select all that apply)

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler