Question

Numerical Exercises. You must show your work and label all graphs carefully and legibly. Not showing your work will get you zero points on the question, even if your answer is correct.

1a. Assume the nominal interest rate is 17 percent and the expected rate of inflation is 12 percent. Calculate real rate of interest.

b. Now assume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 1 percent. Calculate the real rate of interest.

c. Assume the expected rate of inflation is 3 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per ye

Answer 1

THE FORMULA IS AS FOLLOWS - REAL INTEREST RATE = NOMINAL INTEREST RATE - INFLATION RATE

HENCE AS PER THIS FORMULA , THE SOLUTION IS AS FOLLOWS-

1- REAL INTEREST RATE = 17% - 12%

= 5%

2 - REAL INTEREST RATE = 4% - (-1)%

= 4+1

= 5%

3 - NOMINAL INTEREST RATE = REAL INTEREST RATE + RATE OF INFLATION

= 2% + 3%

= 5%