I'm confused now by the relationship between the crystal/int osc at 8mhz and the various clocks :?

So at 8mhz with Fosc/4 & 1/8 prescaler timer1 is ticking at 250,000hz? OK I get that.

But the sytem instruction clock is operating at? 8mhz instruction cycles a second or Fosc/4 = 2mhz? or something else?