After a 1 year investment you receive 8.5% interest (nominal) from your bank. However, looking at...
After a 1 year investment you receive 8.5% interest (nominal) from your bank. However, looking at how prices have changed, you soon realize that the real rate of interest was actually 1.6%. How much was inflation during that year?
Homework Answers
Based on Fischer relation,
(1 + Nominal rate) = (1 + Real rate) * (1 + Inflation)
(1 + 8.5%) = (1 + 1.6%) * (1 + Inflation)
1.085 = 1.016 * (1 + Inflation)
1 + Inflation = 1.085/1.016 = 1.0679
Inflation = 0.0679
Inflation = 6.79%
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