What is the expected real interest rate

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The one-year interest rate is 10% and the expected annual inflation rate is 5%.

a. What is the expected real interest rate?

b. If the expected inflation suddenly rises to 7%, using Fisher's theory, critically discuss how would the nominal interest rate be affected? What about real interest rate? How would your answer change if the expected inflation rate suddenly decreases to 3%?

Reference no: EM132478309

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