Suppose the inflation premium is 2 percent and the nominal interest rate is 1 percent. Instructions: In part a, enter your answer as a whole number. In part b, round your answer to 1 decimal place. If you are entering any negative numbers be sure to include a negative sign () in front of those numbers a. What is the real interest rate? b. What if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent?

Question

Andres Pineda

Business

13 March, 13:45

Suppose the inflation premium is 2 percent and the nominal interest rate is 1 percent. Instructions: In part a, enter your answer as a whole number. In part b, round your answer to 1 decimal place. If you are entering any negative numbers be sure to include a negative sign () in front of those numbers a. What is the real interest rate? b. What if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent?

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Answers (1)

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Shiloh Escobar · Answer 1

(a) Real Interest Rate = - 1 %

(b) Real Interest Rate = - 2.4 %

Explanation:

Real Interest Rate = (1 + Nominal Interest rate) / (1+Inflation Rate) - 1

(a) Real Interest Rate = (1+0.01) / (1+0.02) - 1

= - 1 %

(b) Real Interest Rate = (1+0.005) / (1+0.03) - 1

= - 2.4 %

Real Interest Rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.