Question

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:________.A. 8 percent. B. 5 percent. C. 3 percent. D. 2 percent

Answer 1

Answer:

Inflation rate= 0.03 = 3%

Explanation:

Giving the following information:

Nominal interest rate= 0.05

Real interest rate= 0.02

To calculate the inflation rate, we need to use the following formula:

Real interest rate= nominal interest rate - inflation rate

Inflation rate= nominal interest rate - real interest rate

Inflation rate= 0.05 - 0.02

Inflation rate= 0.03 = 3%