Question

1. The nominal interest rate is8% and the inflation rate is 6%, what is the real rate of interest?

Answer 1

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Answer:

1. 1.89%
2. 5.06%

Step-by-step explanation:

1. Solving for real interest rate, we find it to be ...

  real interest rate = (1 +nominal rate)/(1 +inflation rate) -1

  = 1.08/1.06 -1 ≈ 1.89%

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2. Solving for nominal interest rate, we find it to be ...

  nominal interest rate = (1 +real interest rate)·(1 +inflation rate) -1

  = (1.02)(1.03) -1 ≈ 5.06%