Question

If inflation in the United States is 4% per year and in the United Kingdom it is 8% per year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that the interest rate in the United States is:_____a. 2%. b. 4%. c. 6%. d. 8%.

Answer 1

Answer:

c. 6%.

Explanation:

Nominal interest rate = Real interest rate + Expected rate of inflation

Real interest rate = Nominal interest rate - Expected rate of inflation

United Kingdom

Real interest rate = 8% - 6% = 2%

Use Real Interest rate globally

Nominal interest rate = Real interest rate + Expected rate of inflation

Nominal interest rate = 2% + 4% = 6%