Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate of 2 percent. for each of the expected inflation rates of 0, 2, 4, 6, and 8 percent, calculate the nominal interest rate and after tax expected real interest rate if the tax rate is 30m percent.
SAMPLE PROBLEM: Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate of 10%. For an expected inflation rate of 5%, calculate the nominal interest rate and the after-tax expected real interest rate if the tax rate is 9%
Nominal interest rate (i) = r + ?e
Plug in the value of ?e and the given value of r. The results is:
i = .10 + .05 = .15 or 15%
After-tax expected real interest rate (ra ) = [(1- t ) × i ] ? ?e
Plug in the value to get [(1-0.09) x 0.15] - .05 = 0.0865 or 8.65%