Question

Currently, the price index used to calculate the inflation rate is equal to 90. The general expectation throughout the economy is that nect year its value will be 99. The current nominal interest rate is 12 percent. What is the real interest rate?

Answer 1

Answer: The correct answer is "2%".

Explanation: The inflation rate is calculated through the formula:

(price index 1 - price index 0 / price index 0) x 100

So : (99 - 90 / 90) x 100 = 10% is the expected inflation rate.

And the real interest rate is equal to the difference between the nominal interest rate and the inflation rate.

So: 12% - 10% = 2% is the real interest rate.