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5 March, 13:53

If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then

a. the expected real interest rate is 7 percent.

b. the expected real interest rate is 1 percent.

c. the expected real interest rate is 1.33 percent.

d. the expected real interest rate is 12 percent.

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Answers (1)
  1. 5 March, 14:06
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    Option (b) is correct.

    Explanation:

    Given that,

    If a bank posts

    Nominal interest rate = 4 percent

    Expected inflation = 3 percent

    Real interest is defined as the difference between nominal interest rate and inflation rate.

    Expected Real interest rate = Nominal interest rate - Inflation rate

    = 4 percent - 3 percent

    = 1 percent

    Therefore, the expected real interest rate is 1 percent.
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