ECO349H5 Study Guide - Midterm Guide: Fisher Equation, Real Interest Rate, Nominal Interest Rate
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This test should be answered in ballpoint pen and students who attempt the test in pencil would surrender their right to request for re-assessment. (ii) Answer all questions in point form and only in the designated pages. How do financial intermediaries operate with the existence of this problem? (26 marks) Discuss the advantage(s) and disadvantage(s) of commodity money as payments system. (6 marks) Discuss the advantage(s) and disadvantage(s) of cheques as payments system. (13 marks) State how the fisher equation relates nominal interest rate, real interest rate, and expected rate of inflation. (3 marks) Suppose people have perfect foresight such that the actual rate of inflation always equals to the expected rate of inflation. Given the values of nominal interest rate and the expected rate of inflation, use a numerical example to demonstrate that the actual real interest rate may not always equal to what the. Use a numerical example to support your argument. (9 marks)
