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What does the nominal interest rate equal, given the following? a. Real interest rate = 3 percent; expected inflation rate = 1 percent b. Real interest rate = 5 percent; expected inflation rate = −3 percent
Macroeconomics
Solutions
Macroeconomics
What does the nominal interest rate equal, given the following?
a. Real interest rate = 3 percent; expected inflation rate = 1 percent
b. Real interest rate = 5 percent; expected inflation rate = −3 percent
(a)
The nominal interest rate.
Explanation of Solution
It is given that the real interest rate is 3 percent, and the expected inflation rate is 1 percent.
The nominal interest rate can be calculated using Equation (1) as follows:
(b)
The nominal interest rate.
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