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Explain (and provide a diagram that illustrates) how you would expect the recent statement by the
U.K. Chancellor that the U.K. is currently in recession will impact the demand and supply for loanable
funds. What is the reasoning underpinning the Fisher effect’s implied positive relationship between
expected inflation and nominal interest rate?
(b) Given the current U.K. economic environment, with galloping inflation, suppose investors desire an
8 per cent real rate of interest and expect inflation to be 12 per cent over the investment period.
Determine the desired real rate of interest.
(c) Suppose that investors desire a 10 per cent real rate and expect inflation to gallop to 14 per cent.
What is the nominal rate of interest?
(d) Assume that as a result of a rapid fall in gas and oil prices, realised inflation is now
8 per cent
rather than 14 per cent. Calculate the real rate of interest.
(e) Suppose inflation is persistent and, as such, turns out to be higher than expected, at 26 per cent rather
than 8 per cent. Determine the realized rate and comment on your calculations in parts (d) and (e).

Sagot :

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