If the nominal interest rate is 8 percent and expected inflation is 3 percent, the approximate expected real interest rate is
Correct answer: B. 5 percent
- A. 3 percent
- B. 5 percent
- C. 8 percent
- D. 11 percent
Explanation
The approximate expected real interest rate equals the nominal interest rate minus expected inflation. Thus, 8 percent minus 3 percent gives 5 percent. The Fisher effect is concerned with this relationship between nominal rates and inflation expectations.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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