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Example Questions
Example Question #1 : Flow Of Funds
The real interest rate can be approximated by the Fisher equation:
What is the exact formula for the real interest rate?
Possible Answers:
The Fisher equation always gives the exact real interest rate.
Correct answer:
Explanation:
The real interest rate is defined as the nominal appreciated value of assets divided by the new price level of the assets. The nominal appreciated value is simply , while the new price level is equal to . This gives the real appreciated value of assets. We then subtract 1 to get the real interest rate.
Example: (according to the Fisher equation)
The Fisher equation comes close, but is not actually correct.
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