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.

Question

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.

BlackTom AI · Accepted Answer

We need to restate the problem and then walk through the reasoning step by step, addressing what each piece means and how to combine them.

Restating the question and given values:
- You are told r-bar = 1% and pi-bar = 2.5%.
- The nominal interest rate is defined by the policy rule i_t = R_t + π_t, and the Fisher equation connects real and nominal terms via i_t ≈ r_t + π_t, where r_t is the real (policy) rate and π_t is expected inflation.
- The prompt also mentions using your answer from the previous question, which would have given a value for the real policy rate R_t (or equivalently for i_t) to be combined with π_t to obtain i_t.

Key idea to apply:
- The Fischer equation states that the nominal rate equals the real rate plus expected inflation: i_t = r_t + π_t.
- If the question provides r-bar as the real rate and pi-bar as expected inflation, and asks you to compute i_t, you substitute these values directly into i_t = r-bar + pi-bar.
- If the previous question’s answer supplied a particular real rate R_t (not r-bar) that you must use here, you would use i_t = R_t + π_t with that R_t and the given π_t (which here is pi-bar = 2.5%). The instruction to use the previous answer means you should replace R_t with the numeric value you obtained earlier when forming the sum with π_t.

Proceeding with the given numeric values (or with the previous answer if it provides a real rate to add):
- Case A: If you interpret r-bar = 1% as the real rate to be used in i_t = r-bar + pi-bar, then i_t = 1% + 2.5% = 3.5%.
- Case B: If your previous question yielded a different real rate R_t, then you should add that R_t to pi-bar = 2.5% to obtain i_t. In other words, i_t = R_t + 2.5%.

Important nuance:
- The phrase "Using your answer from the previous question" implies a link: the R_t you should use in the policy rule i_t = R_t + π_t may come from the prior step’s result. If that prior step gave R_t = 3.3%, then i_t would be 3.3% + 2.5% = 5.8%. If instead the prior step’s result was simply the real rate r-bar = 1%, then i_t would be 3.5% as shown in Case A. The distinction hinges on whether you are supposed to treat the given r-bar as the real rate to plug into the Fisher equation directly, or as a separate input in the policy-rule sum that then uses the prior answer for R_t.

Summary of the two plausible routes:
- Route 1 (direct Fischer addition with given r-bar and pi-bar): i_t = 1% + 2.5% = 3.5%.
- Route 2 (using prior question’s real-rate result R_t in the policy rule): i_t = R_t + 2.5%, where R_t is whatever real rate you obtained previously; for example, if R_t = 3.3%, then i_t = 5.8%.

In practice, to complete the problem you should:
- Identify what the prior question’s result provides for the real rate to use in i_t = R_t + π_t.
- Add π_t = 2.5% to that real rate to obtain the nominal i_t.
- If the instruction explicitly intends you to use r-bar = 1% as the real rate in i_t = r-bar + π_t, then you would compute i_t = 3.5%.

Note on consistency:
- The explicit numbers in the prompt (r-bar = 1%, pi-bar = 2.5%) point to a straightforward 3.5% if you apply i_t = r_bar + pi_bar directly, but the prompt’s clause about using the previous answer could modify which real rate you use. Ensure you align with the intended workflow from your course materials or earlier steps to determine which real-rate input should be added to 2.5%.

FA25 ECON 302 002 Final Exam

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.

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