In response to a 3 percentage point increase in inflation the Federal Reserve is increasing the nominal interest by 4.75 percentage points. Based on this information you know that the real interest rate changes by ______ percentage points.

Round your answer to the nearest tenth of a percentage points. In increase is a positive number; a decrease is a negative number.

Question

In response to a 3 percentage point increase in inflation the Federal Reserve is increasing the nominal interest by 4.75 percentage points. Based on this information you know that the real interest rate changes by ______ percentage points.

Round your answer to the nearest tenth of a percentage points. In increase is a positive number; a decrease is a negative number.

BlackTom AI · Accepted Answer

The Fisher equation relates the nominal interest rate (i), the real interest rate (r), and expected inflation (π): i ≈ r + π. For small changes, the change in the real rate equals the change in the nominal rate minus the change in inflation: Δr = Δi − Δπ.

Step-by-step reasoning and calculation:
1. Given change in nominal interest: Δi = +4.75 percentage points.
2. Given change in inflation: Δπ = +3.00 percentage points.
3. Apply the relation for changes: Δr = Δi − Δπ.
4. Substitute the values: Δr = 4.75 − 3.00.
5. Compute the difference: Δr = 1.75 percentage points.

Interpretation: Because the nominal rate was raised by 4.75 points while inflation increased by 3.00 points, the real interest rate increased by 1.75 percentage points. The positive sign indicates an increase.

Why this is correct: The Fisher relationship isolates the real return by subtracting inflation from the nominal return. Any additional lift in the nominal rate beyond the rise in inflation increases the real rate by that excess amount (4.75 − 3.00 = 1.75).

Why other answers would be incorrect:
- Saying the real rate changed by 4.75 would ignore the inflation offset.
- Saying it changed by 3.00 would confuse inflation’s change with the real-rate change.
- A negative change (e.g., −1.75) would be wrong because the nominal increase exceeded inflation, producing a positive real change.

Conclusion: The real interest rate increases by 1.75 percentage points, which matches the provided answer (1.75).

类似问题

When the interest rate is low, there are greater incentives to and fewer incentives to .

Compared to long-term government bonds, interest rates on three-month Treasury bills fluctuate and are on average.

The Fisher effect is used to demonstrate a strong correlation between inflation rates and

[table] Year | Year1 | Year2 | Year3 | Year4 | Year5 Short Rate ri | 4.00% | 6.00% | 5.00% | 3.00% | 2.00% [/table]The following Treasury Short Rates were the general market expectations for the near-term. Which of the following statement during these 5 years is most correct?

The US 10-Yr Treasury Rate is 4.2%, inflation in Peru is 9% and the inflation rate in the US is 3%. Using the interest rate arbitrage approach, what is the risk-free rate in Peru.[Fill in the blank]

Suppose the nominal interest rate is 10 percent, the tax rate on interest income is 28 percent, and the inflation rate is 6 percent. Then the after-tax real interest rate is -3.2 percent.

The nominal interest rate is 6 percent and the real interest rate is 2.5 percent. What is the inflation rate?

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单