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9. Please state the ex ante Fisher Equation for interest rates. In this equation, some of...

9. Please state the ex ante Fisher Equation for interest rates. In this equation, some of the components are ‘known values” and some are “unknown”. Which are known or unknown, and why would this distinction matter?

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Answer #1

The ex-ante (before) form of the Fisher equation is expressed as:

where i = nominal rate of interest
r = real rate of interest
= expected rate of inflation in the next period

The real rate of interest is the known value because it has been calculated with the actual (obesrved) rate of inflation in the current period, i.e. . The nominal rate of interest rate in the unknown value because we use the ex ante Fisher equation to ascertain its value. The is the expected rate of inflation in the next which depends on the actual (observed) rate of inflation.

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