If you lend money at a 12% nominal interest rate, but you expect inflation to be...

Question

Question

Answer 1

Answer #1

1. Given that,

Nominal interest rate=12%

Inflation rate. =7%

purchasing power to grow at rate = Nominal interest rate divided by expected inflation rate.

i.e purchasing power grow at rate of=12/7

=1.7%.

2. The real interest rate os negative when the nominal interest rate is "less than" the inflation rate.

3. If the nominal interest rate is 3% and the expected inflation rate is 1% then real interest rate is,

Real interest rate = Nominal interset rate - Inflation rate.

i.e Real Interest rate = 3%-1%

=2%.

Answer 2

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