Question

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation rate is ______ percent?

1) 3
2) 5
3) 2
4) Cannot be determined

Answer 1

Using the equation that the real interest rate equals the nominal interest rate minus the inflation rate, if the nominal rate is 5% and the real rate is 2%, the inflation rate would be 3%. Therefore, the inflation rate is approximately 2.94 percent. Since this value is not an exact match to any of the provided options, the closest one is:3

Step-by-step explanation:

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation rate can be calculated using the relationship that the real interest rate is equal to the nominal rate minus the inflation rate. This relationship can be rearranged to solve for the inflation rate as follows:

• Real Interest Rate = Nominal Interest Rate - Inflation Rate
• 2% = 5% - Inflation Rate
• Inflation Rate = 5% - 2%
• Inflation Rate = 3%

Therefore, the inflation rate is 3 percent