Asked by Jonah Marukot on Jul 21, 2024
Verified
If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is
A) −2 percent.
B) 0.4 percent.
C) 2 percent.
D) 12 percent.
Nominal Interest Rate
The interest rate before adjustment for inflation, representing the face value of financial transactions.
Real Interest Rate
The interest rate that accounts for inflation, reflecting the actual cost of borrowing and the real return on savings.
Inflation Rate
The level of acceleration in the overall pricing of goods and services, resulting in a decline in buying efficiency.
- Determine the effect of inflation on both nominal and real interest rates.
Verified Answer
KS
Krytal Shane BalubarJul 24, 2024
Final Answer :
A
Explanation :
The inflation rate can be calculated using the Fisher equation, which is: nominal interest rate = real interest rate + inflation rate. Rearranging the equation to solve for the inflation rate gives: inflation rate = nominal interest rate - real interest rate. Plugging in the given values: inflation rate = 5% - 7% = -2%.
Learning Objectives
- Determine the effect of inflation on both nominal and real interest rates.