(Inflation and interest rates) Assume the expected inflation rate is 3.8 percent. If the current real rate of interest is 6.4 percent, what should the nominal rate of interest be?

Explanation:

In Macroeconomics,Fisher Equation indicates the mathematical relationship between the real interest rate and the nominal interest rate involving the inflation rate.In this example,the expected inflation rate is given as 3.8% or 0.038 and the real interest rate as 6.4% or 0.064.Now,according to Fisher Equation,the contracted nominal interest rate(as the inflation rate is expected) is equal to the sum or addition of the real interest rate and the expected inflation rate.

Therefore,based on Fisher Equation,the contracted nominal interest rate= or 10.2%

Hence,the contracted nominal interest rate or the nominal interest rate in this case is 10.2%.

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