Assume the real rate was 9.5% and the inflation rate was 4%. Using the Fisher Effect, what was the nominal rate?

Multiple Choice

13.88%

12.88%

12.12%

11.50%

9.50%

The Fisher Effect is used to relate the nominal interest rate, the real interest rate, and the inflation rate. The formula is:

\[
(1 + \text{Nominal Rate}) = (1 + \text{Real Rate}) \times (1 + \text{Inflation Rate})
\]

Given:
- Real Rate = 9.5% or 0.095
- Inflation Rate = 4% or 0.04

Now, plug the values into the formula:

\[
(1 + \text{Nominal Rate}) = (1 + 0.095) \times (1 + 0.04)
\]

\[
(1 + \text{Nominal Rate}) = 1.095 \times 1.04
\]

\[
(1 + \text{Nominal Rate}) = 1.1398
\]

So:

\[
\text{Nominal Rate} = 1.1398 - 1 = 0.1398 = 13.98\%
\]

The closest answer to this result is **13.88%**.

The correct answer is **13.88%**.

Would you like more details or have any questions?

Here are 5 related questions to consider:
1. How does the Fisher Effect apply in cases of negative inflation rates (deflation)?
2. What happens to the nominal rate if inflation significantly increases while the real rate stays constant?
3. Can the Fisher Effect be used for short-term interest rates, and why?
4. How would the nominal rate change if the real rate was instead 8% with the same inflation rate?
5. What are some real-world examples where the Fisher Effect is useful for investors?

**Tip:** Remember, nominal rates incorporate both the real rate and inflation expectations, so they tend to rise as inflation increases!

Assume the real rate was 9.5% and the inflation rate was 4%. Using the Fisher Effect, what was the nominal rate?

Multiple Choice

13.88%
12.88%
12.12%
11.50%
9.50%

Learn how to calculate the nominal interest rate using the Fisher Effect formula with a real rate of 9.5% and an inflation rate of 4%. The detailed solution includes step-by-step calculations. Suitable for Grades 10-12 students studying economics or finance.

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