Example of Money Rate
We can calculate
the money rate if we are given the inflation rate and real rate prevailing in
the economy. The formula for calculating money rate is known fisher effect.
Formula for Money Rate
(1+Money Rate)
= (1+Inflation Rate)(1+Rate Rate)
Simple Example
For example
the inflation rate in the economy is 5% and the real rate is 2%, then the money
rate can be calculated as under
Money rate =
(1.05)(1.02)-1
= (1.071)-1
=.071
=7.1%
In simple
term the money rate is addition of inflation rate and real rate, however, the
actual money rate may be slightly high if calculated through fisher effect.
