Question

50. Ex-Ante Fisher Application Problems
For the following practice Fisher Equation calculations, You are forecasting an inflation rate of 5.50% and you desire a real, inflation adjusted
real return of 2.5%. What nominal interest rate will you demand to protect you from
expected inflation?

Answer 1

Calculation of the nominal interest rate -

Fisher equation is as follows -

(1+nominal interest rate) = (1+real interest rate)*(1+inflation)

here nominal interest rate = ?

real interest rate = 2.5%

inflation = 5.50%

put all the values in above formula

(1+nominal interest rate) = (1+0.025)*(1+0.055)

(1+nominal interest rate) = 1.081375

nominal interest rate = 1.081375 - 1

= 8.14%

8.14% nominal interest rate will be demanded to protect from expected inflation.

Please check with your answer and let me know.