22 June, 12:00

# Candace just purchased a certificate of deposit at her local bank with a stated rate of 5.3%. Candace has had BA3500 so she knows that the real rate the CD is paying is 3.1%. What are the approximate and exact rates of inflation that Candace is using? Take your answer out four decimal places.

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1. 22 June, 12:17
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The approximate rate of inflation is 2.2000% and the exact rate of inflation is 2.1339%

Explanation:

First of all it is important to understand what does inflation means, Inflation is a situation in the economy where the prices of all the goods and services in the country rises. At this situation in the economy, the central banks tries to reduce the flow of money supply in the economy and usually increases the interest rates so that the consumption is less in the economy.

Formula for calculating the approximate inflation rate is =

Nominal rate of interest - real rate of interest

we have been given value of both interest rates in the question,

Approximate inflation rate = 5.3% - 3.1%

= 2.2%

therefore the approximate inflation rate is 2.2%

Formula for calculating the exact inflation rate, we will use

= (1 + nominal rate / 1 + real rate) - 1

= (1 + 5.3% / 1 + 3.1%) - 1

= (1 +.053 / 1 +.031) - 1

= (1.053 / 1.031) - 1

= 1.0213 - 1

=.0213

now multiplying it by 100 to make it in to percentage

=.021339 x 100

= 2.1339%

therefore the exact inflation rate is 2.1339%