   Chapter 14, Problem 5WNG

Chapter
Section
Textbook Problem

What does the real interest rate equal, given the following?a. Nominal interest rate = 8 percent; expected inflation rate = 2 percentb. Nominal interest rate = 4 percent; expected inflation rate = −4 percentc. Nominal interest rate = 4 percent; expected inflation rate = 1 percent?

(a)

To determine

The real interest rate.

Explanation

It is given that the nominal interest rate is 8 percent, and the expected inflation rate is 2 percent.

The real interest rate can be calculated using Equation (1) as follows:

Real interest rate=Nominal interest rateExpected rate of inflation (1

(b)

To determine

The real interest rate.

(c)

To determine

The real interest rate.

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