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17 December, 17:14

Assume a nominal interest rate on oneminusyear U. S. Treasury Bills of 3.80% and a real rate of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate of inflation in the U. S. over the next year?

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  1. 17 December, 17:24
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    1.76%

    Explanation:

    Fisher Effect equation:

    (1 + nominal interest rate) = (1 + real interest rate) x (1 + expected annual inflation)

    1.038 = 1.02 x (1 + expected inflation rate)

    --> Expected inflation rate = 1.76%
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