Question

The interest rate is 15.5 percent a year in Indonesia and 1.7 percent in a year in Hong Kong. The inflation rate is 12.6 percent a year in Indonesia and -1.4 percent a year in Hong Kong Calculate the real interest rate in Indonesia and Hong Kong.

Answer 1

Answer:

In Indonesia, 2.58%,

In Hong Kong, 3.14%

Explanation:

Since,

$\text{Real interest rate}=\frac{\text{1+Nominal interest rate}}{\text{1+Inflation rate}}-1$

In Indonesia,

Nominal interest rate = 15.5% = 0.155,

Inflation rate = 12.6% = 0.126,

So, $\text{Real interest rate}=\frac{1+0.155}{1+0.126}-1=\frac{1.155}{1.126}-1=0.02575\approx 0.0258\approx 2.58\%$

In Hong Kong,

Nominal interest rate = 1.7% = 0.017,

Inflation rate = -1.4% = -0.014,

So, $\text{Real interest rate}=\frac{1+0.017}{1-0.014}-1=0.03144\approx 0.0314\approx 3.14\%$