Fisher Effect Multiple Choice According to Fisher Effect, if the expection infal

Question

Fisher Effect Multiple Choice

According to Fisher Effect, if the expection infaltions in Japan is 6% and in Korea is 3%, what should be implied interest rate differential between 2 countries:

(A)Real interest rate in Japan should be 3% higher than real interest rate in Korea

(B)Real interest rate in Jpaan should be 3% lower than real interest rate in Korea

(C)Nominal interest rate in Jpaan should be 3% lower than nomianl interest rate in Korea

(D)Nominal interest rate in Japan should be 3% higher than nominal interest rate in Korea

Explanation / Answer

Fisher effect is an economic theory which describe the relationship between nominal interest rate and Inflation rate. Real Interest rate is calculated by subtraction of inflation from nominal Interest rate.

Inflation rate in Japan is 6% and Inflation rate is 3%. Since inflation rate in Japan is 3% higher than Korea.

So, According to Fisher effect real interest rate in Korea is 3% higher than Real Interest rate in Japan.

Hence, option (B) is correct answer.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.