Calculate the nominal interest rate

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Reference no: EM13250314

Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate of 2 percent. for each of the expected inflation rates of 0, 2, 4, 6, and 8 percent, calculate the nominal interest rate and after tax expected real interest rate if the tax rate is 30m percent.

SAMPLE PROBLEM: Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate of 10%. For an expected inflation rate of 5%, calculate the nominal interest rate and the after-tax expected real interest rate if the tax rate is 9%

Nominal interest rate (i) = r + ?e

Plug in the value of ?e and the given value of r. The results is:

i = .10 + .05 = .15 or 15%

After-tax expected real interest rate (ra ) = [(1- t ) × i ] ? ?e

Plug in the value to get [(1-0.09) x 0.15] - .05 = 0.0865 or 8.65%

Reference no: EM13250314

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