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Chapter 7: Q.13 (page 162)

Currently, the price index used to calculate the inflation rate is equal to 90. The general expectation throughout the economy is that next year its value will be 99. The current nominal interest rate is 12 per cent. What is the real interest rate?

Short Answer

Expert verified

The real interest rate is2%

Step by step solution

01

introduction

The expected inflation for the following year is found by

鈬�PriceIndexofnextyear-PriceIndexofcurrentyearPriceIndexofcurrentyear脳100=99-9090脳100=10%

02

explanation

Now ,

real interest rate = nominal interest rate - expected inflation

鈬�12%-10%=2%

The real interest rate is2%.

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Most popular questions from this chapter

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