Question

1. The nominal interest rate is8% and the inflation rate is 6%, what is the real rate of interest?

2. If the real rate of interest is 2%, and the expected rate of inflation is 3% then the nominal rate of interest is:

use this formula to solve 1&2,
1+ nominal interest rate = (1+ real interest rate) * (1+ inflation rate)​

Answer 1

9514 1404 393

Answer:

1. 1.89%
2. 5.06%

Explanation:

1. Solving for real interest rate, we find it to be ...

real interest rate = (1 +nominal rate)/(1 +inflation rate) -1

= 1.08/1.06 -1 ≈ 1.89%

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2. Solving for nominal interest rate, we find it to be ...

nominal interest rate = (1 +real interest rate)·(1 +inflation rate) -1

= (1.02)(1.03) -1 ≈ 5.06%