Question

Suppose the inflation premium is 2 percent and the nominal interest rate is 1 percent. Instructions: In part a, enter your answer as a whole number. In part b, round your answer to 1 decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is the real interest rate?

Answer 1

Answer:

1% negative

Explanation:

a. What is the real interest rate?

the inflation premium is an added value to the real interest rate to cover the effect of inflation and be more attractive to potential investor:

real interest rate + inflation premium = nominal interest rate

real interest rate + 2% = 1%

we clear real interest:

real interes rate = 1% - 2% = -1%

The real interest is 1% negative