   Chapter 14.4, Problem 1ST

Chapter
Section
Textbook Problem

If the expected inflation rate is 4 percent and the nominal interest rate is 7 percent, what is the real interest rate?

To determine

The real interest rate.

Explanation

It is given that the nominal interest rate is 7 percent, and the expected inflation rate is 4 percent.

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

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

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