Question

If the nominal interest rate is 12 percent and the real interest rate is 7 percent, then the inflation rate is

a. 5 percent.
b. 0.4 percent.
c. -2 percent.
d. 2 percent.
e. 12 percent.

Answer 1

The inflation rate is found by subtracting the real interest rate from the nominal interest rate. In this case, the correct inflation rate is 5 percent, answer option a.

Step-by-step explanation:

When dealing with the concepts of nominal interest rate, real interest rate, and inflation rate, it is crucial to understand their relationship. The real interest rate is the nominal interest rate minus the inflation rate. To find the inflation rate given the nominal and real interest rates, you can use the formula:

Inflation Rate = Nominal Interest Rate - Real Interest Rate

In the example provided, the nominal interest rate is 12 percent and the real interest rate is 7 percent. By applying the formula:

Inflation Rate = 12% - 7% = 5 percent

Therefore, the correct answer is a. 5 percent. This demonstrates that the inflation rate can be calculated as the difference between the nominal and real interest rates.