Explain why the Fisher equation is not highly accurate at high rates of inflation. Use an example.
What will be an ideal response?
Consider a lender who loans $100 for a year, in an environment of 10% inflation. If the lender wants to earn a real interest rate of 2%, the Fisher equation says he/she should charge a nominal interest rate of 12.0%. The reality is, however, that the lender wanted to have 2% more purchasing power at the end of the loan. Since inflation also impacts the interest earned, we can calculate the actual interest rate he/she needs to charge by realizing that if the lender wanted $2.00 more purchasing power per hundred dollars loaned, we can take $102 and multiply this by 1 + the rate of inflation or 1.1. $102 × 1.1 = $112.20. Thus he/she really needs to charge a nominal interest rate of 12.2% or slightly more than the 12.0% of the Fisher equation
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If a rise in anticipated inflation produces for some reason a less-than-equal rise in the nominal interest rate, this ________ the costs of anticipated inflation by ________ saving
A) reduces, encouraging B) reduces, discouraging C) increases, encouraging D) increases, discouraging
Multiplying the dependent variable by 100 and the explanatory variable by 100,000 leaves the
A) OLS estimate of the slope the same. B) OLS estimate of the intercept the same. C) regression R2 the same. D) variance of the OLS estimators the same.
Standardized coefficients are also referred to as:
A. beta coefficients. B. y coefficients. C. alpha coefficients. D. j coefficients.
AFL-CIO stands for:
A. American Federation of Labor-Congress of Industrial Organizations. B. American Federation of Labor-Committee for Industrial Opportunity. C. Assembly of Factory Laborers-Congress of Industrial Organizations. D. Assembly of Factory Laborers-Committee for Industrial Opportunity.