Question

If the nominal rate of interest is 12.65% and the real rate of interest is 8.12%, what is the expected rate of inflation?

Answer 1

Inflation refers to continuous rise in price levels.
Given that;
Nominal interest rate=12.65%
Real interest rate=8.12%

The formula we need to use to solve the question is;
(1+Nominal interest rate)=(1+Real interest rate)*(1+Inflation rate)
Substituting the values, we get;
(1+12.65%)=(1+8.12%)*(1+Inflation rate)
=>1.1265=1.0812*(1+Inflation rate)
=>1.1265/1.0812-1=Inflation rate
=>Inflation rate=1.041897891-1
=0.041897891 or 4.19% (Rounded to 2 decimal places)

Answer: Hence, the expected rate of inflation is 4.19%