Question

if the nominal interest rate is 8% and expected inflation is 2.5% then what is the real interest rate

Answer 1

Step-by-step explanation:

`According \ to \ Fischer's \ exact \ formula`

`r = (i-e)/(1+e)`

`here; \\ \\ real \ interest \ rate \ (r) \ = ??? \\ \\ inflation \ rate \ (e) \ = 2.5%`

`nominal \ interest \ rate \ (i) = 8%`

`r = (0.08-0.025)/(1+0.025)`

`r = (0.055)/(1.025)`

`r = 0.0537 \\ \\ r = 5.37 \%`

`According \ to \ Fischer's \ approximation \ formula: \\ \\ r = i- e \\ \\ r = (8 -2.5) \% \\ \\ r= 5.5 \%`