What would you expect the nominal rate of interest to be if the real rate is...

What would you expect the nominal rate of interest to be if the real rate is 4.5 percent and the expected inflation rate is 7.1 percent?

Expert Solution

Nominal rate of interest as per additive method = Real rate + Inflation rate

= 4.5% + 7.1%

= 11.60%

Nominal rate of interest as per multiplicative method = (1+ Real rate) * (1+ Inflation rate) - 1

= (1+4.5%) * (1+7.1%) - 1

= 11.92%

Both methods are correct and accepted.

jeff jeffy answered 1 year ago

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