If the nominal rate of interest is 4.25 percent and the expected rate of inflation is 1.75 percent, what is the real rate of interest?

Question:

If the nominal rate of interest is 4.25 percent and the expected rate of inflation is 1.75 percent, what is the real rate of interest?

Answer:

Using the Fisher equation:

i = r + ∆Pe + r ΔPe where i = 0.0425 and ΔPe = 0.0175

Solving for r, we get r = 0.02457, or 2.457%.

 

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