Problem 3. In class, we learned the Fisher Hypothesis: Treal From + E(i) It states that...

 

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Problem 3. In class, we learned the Fisher Hypothesis: Treal From + E(i) It states that the real interest rate is the nominal interest rate minus the expected inflation. We observe inflation. We don't directly observe investor expectations about inflation, but we can try and infer them. Suppose we see investors buying 10-year 0-coupon government bonds that offer a nominal interest rate Tnom of 4.5%. If inflation right now is 7.5%, which do you think is more likely? (Explain in 1 to 2 sentences.) Choice A: Investors are signing up to earn a negative 3% real rate each year for 10 years Choice B: Investors expect future inflation will be lower Problem 3. In class, we learned the Fisher Hypothesis: Treal From + E(i) It states that the real interest rate is the nominal interest rate minus the expected inflation. We observe inflation. We don't directly observe investor expectations about inflation, but we can try and infer them. Suppose we see investors buying 10-year 0-coupon government bonds that offer a nominal interest rate Tnom of 4.5%. If inflation right now is 7.5%, which do you think is more likely? (Explain in 1 to 2 sentences.) Choice A: Investors are signing up to earn a negative 3% real rate each year for 10 years Choice B: Investors expect future inflation will be lower