Recently, the rate paid by banks on savings accounts was 0.1 percent. However, at the same time, inflation was around 1.5 percent. What was the saver’s real rate of interest on his or her savings? Banks expect that the inflation rate in the long run will be 2 percent. They want a real return of 1 percent on their mortgage loans. What nominal rate should they charge home buyers looking for a mortgage? Explain using the Fisher equation.

Recently, the rate paid by banks on savings accounts was 0.1 percent. However, at the same time, inflation was around 1.5 percent. What was the saver’s real rate of interest on his or her savings? Banks expect that the inflation rate in the long run will be 2 percent. They want a real return of 1 percent on their mortgage loans. What nominal rate should they charge home buyers looking for a mortgage? Explain using the Fisher equation.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.12P

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