Question

What is the real interest rate if the nominal interest rate is 8% and the expected inflation rate is10% over the course of a year?

Answer 1

Real interest rate = [1+nominal interest rate / 1+inflation rate] - 1

As per given in the question-

Nominal interest rate= 8%

inflation rate = 10%

Putting the value in the above mentioned formula

Real interest rate = [ 1+ 8% / 1+ 10% ] -1

= [ 1.08 / 1.1 ] -1

= 0.982 - 1

= -0.0181 %

This cannot be in negative.