Question

The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is: (Hint: keep up to four decimal points in calculation) Group of answer choices 6.86% 5.1% 5.0% 9%

Answer 1

Real interest rate= 0.05 = 5%

Step-by-step explanation:

Giving the following information:

Nominal interest rate= 7%

Expected inflation rate= 2%

The inflation rate decreases the purchasing power of nominal money. It has the opposite effect of the nominal interest rate.

To calculate the real interest rate, we need to use the following formula:

Real interest rate= nominal interest rate - inflation rate

Real interest rate= 0.07 - 0.02

Real interest rate= 0.05 = 5%