Question

After a 1 year investment you receive 9% interest (nominal) from your bank. However, looking at how prices have changed, you soon realize that the real rate of interest was actually 3.8%. How much was inflation during that year? Enter your answer as a percentage, rounded to 2 decimals, and without the percentage sign ('\%'). For example, if your answer is 0.02345 , then enter 2.35

Answer 1

The inflation rate during the year was calculated using the relationship between the nominal interest rate and the real interest rate, resulting in a rate of 5.20%.

Step-by-step explanation:

To calculate the rate of inflation during the year, we can use the relationship between nominal interest rate, real interest rate, and inflation. The formula is the Fisher equation, which states that the real interest rate equals the nominal interest rate minus the inflation rate. In this case, we are given a nominal interest rate of 9% and a real interest rate of 3.8%.

To find the inflation rate, we subtract the real rate from the nominal rate:

Inflation rate = Nominal interest rate - Real interest rate

Inflation rate = 9% - 3.8%

Inflation rate = 5.2%

Therefore, the inflation during the year was 5.20%.