Question

If the nominal interest rate is 7 percent and expected inflation is 4.5 percent, then what is the expected real interest rate?

Select one:
a. 11.5 percent
b. 7 percent
c. 4.5 percent
d. 2.5 percent

Answer 1

The expected real interest rate is 2.5%.

Step-by-step explanation:

The expected real interest rate can be calculated by subtracting the expected inflation rate from the nominal interest rate. In this case, the nominal interest rate is 7% and the expected inflation rate is 4.5%. So, the expected real interest rate is 7% - 4.5% = 2.5%.