Question

The consumer price index was 200 in 2008 and 190 in 2009. The nominal interest rate during this period was 4.5 percent. What was the real interest rate during this period

Answer 1

the real interest rate is 9.5%

Step-by-step explanation:

The computation of the real interest rate is shown below:

But before that inflation rate need to be determined

Inflation rate is

= [CPI this year - CPIlast year] ÷ CPI last year

= {(190 - 200) ÷ 200} × 100

= -0.05 × 100

i = -5%

Now the real interest rate is

real interest rate = nominal interest rate - inflation rate

= 4.5% - (- 5%)

= 9.5%

Hence, the real interest rate is 9.5%