Question

If the inflation rate decreased from 3.33% to 2.90% between October and November, while the nominal interest rate increased from 4.75% to 4.80%, what is the real interest rate in November?

Answer 1

Answer:

1.90%

Explanation:

There is the accordance or connection between nominal and real interest rates. It is basically possible to convert from nominal interest rates to real interest rates. According to the Fisher, there is a equation that's called the Fisher Equation:

Real interest rate ≈ nominal interest rate − inflation rate.

On our example,

Inflation rate in October- 3.33%

Inflation rate in November- 2.90%

Nominal interest rate in October- 4.75%

Nominal interest rate in November- 4.80%

In October,

Real interest rate=4.75%-3.33%=1.42%

In November,

Real interest rate=4.80%-2.90%=1.90%

As a result, we see that there is 1.90% real interest rate in November and the real interest rate has increased 0.48% in November compared to October.

Answer 2

Answer:

Nominal interest rate in November (m) =4.80% = 0.048

Inflation rate in November (i) = 2.90% = 0.029  

Real interest rate in November (r) = ?                              

(1 +  m) = (1 + r)(1 + i)

(1 + 0.048) = (1 + r)(1 + 0.029)

1.048 = (1 + r)(1.029)

1.048 = (1 + r)

1.029

1.0185 - 1 = r

r = 0.0185 =  1.85%                                                                                                                                                                                                                                                                                                                                                                                                                                                                

                                                                                                         

Explanation:

In this case, Fisher's formula will be applied in determining the real interest rate. The nominal interest rate and inflation rate in November were provided in the question with the exception of real interest rate. Therefore, the real interest rate becomes the subject of the formula.