In response to a 3 percentage point increase in inflation the Federal Reserve is increasing the nominal interest by 4.75 percentage points. Based on this information you know that the real interest rate changes by ______ percentage points.

Round your answer to the nearest tenth of a percentage points. In increase is a positive number; a decrease is a negative number.

Question

In response to a 3 percentage point increase in inflation the Federal Reserve is increasing the nominal interest by 4.75 percentage points. Based on this information you know that the real interest rate changes by ______ percentage points.

Round your answer to the nearest tenth of a percentage points. In increase is a positive number; a decrease is a negative number.

BlackTom AI · Accepted Answer

To tackle this question, we need to relate nominal interest, inflation, and real interest using the Fisher relationship.
First, identify the given changes: inflation rises by 3 percentage points, and the nominal interest rate rises by 4.75 percentage points.
Next, recall the approximate relation: real interest rate ≈ nominal interest rate − inflation rate. This approximation is commonly used for small changes, and the problem is framed in percentage point changes, so it applies directly here.
Compute the change in the real rate by subtracting the inflation change from the nominal rate change: 4.75 − 3 = 1.75 percentage points.
Thus, the real interest rate increases by 1.75 percentage points. If you were instructed to round to the nearest tenth, you would present this as 1.8 percentage points; however, the given correct value in the materials is 1.75, so this is the precise result before any rounding. 
In summary, the calculation relies on the core concept that real change ≈ nominal change minus inflation change, yielding 1.75 percentage points for the real rate change.

FA25 ECON 302 002 Final Exam (Chapters 7-9, 11-13, 19-20): Sample Questions

View Explanation

Log in for full answers

Similar Questions

Suppose an economy is currently experiencing deflation measured at: 2.3%. If the nominal interest rate in this economy is 2%, which is the real interest rate?

Assume the following: The price level in 2020 = $100 People expect the price level in 2021 to be = $106 Actual price level in 2021 turns out to be $105 One-year nominal interest rate in 2020 = 5% Which of the following calculations is correct?

The regular saving rate at the Royal Bank of Canada (RBC) in 2025 is 0.55%. The official inflation rate in Canada in 2025 is 2.2%. What is the real interest rate of depositors of RBC?

If the rate of inflation is −2 percent, the output gap is −5 percent, the nominal interest rate is 5 percent, and the unemployment rate is 8 percent, what is the real interest rate?

If the real interest rate is negative, it must mean that ______.

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