Question

If the rate of inflation is 4.8 %4.8%​, what nominal interest rate is necessary for you to earn a 2.2 %2.2% real interest rate on your​ investment? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.

Answer 1

Nominal rate of return= 7.11%

Step-by-step explanation:

Inflation is the increase in the price level.It erodes the value of money.rise in the price of money

Nominal interest is that quoted for investment or loan transactions. It has not been been adjusted for inflation.

Real interest rate is the amount of interest in terms of the the quantity of good and services that can be purchased. It is the nominal interest rate adjusted for inflation.

The relationship between inflation, real interest and nominal interest rate is given using the Fishers Effect;

N = ( (1+R) × (1+F)) - 1

N- nominal rate, R-real rate, F- inflation

real rate - 2.2%, inflation - 4.8%

Nominal rate of return =(1.022)× (1.048) - 1 = 0.071056

Nominal rate of return = 0.071056 × 100 = 7.1056 %

Nominal rate of return= 7.11%