Question

If the inflation rate was 3.40% and the nominal interest rate was 5.60% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places.

Answer 1

Answer:

2.1276%

Explanation:

$\ Real Rate = \frac{1+nominal}{1+inflation} - 1$

1.056/1.034 -1 = 0,021276595744681  rounding to 4 decimal places:

2.1277%

The reasoning behind this formula is the following:

there is a rate that generate the combine effect of the nominal and the inflation rate

Principal (1+real rate)  = Principal x (1+nominal) / (1+ inflation)

removing the principal for clearence:

1+real rate =(1+nominal) x (1+ inflation)

real rate = (1+nominal) x (1+ inflation)  - 1