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Homework answers / question archive / If the real rate of interest is 8% and the nominal rate of interest is 28%, then the rate of inflation must be about a
If the real rate of interest is 8% and the nominal rate of interest is 28%, then the rate of inflation must be about
a. 36%.
b. 24.26%.
c. 3.50%.
d. 18.52%.
e. 23%.
Explanation:
According to Fisher's Equation,
(1+nominal interest) = (1+real interest) * (1+Inflation)
(1+0.28) = (1+0.08) * (1+inflation)
1.28 / 1.08 = 1+inflation
Inflation = 1.1852 - 1
= 0.1852 = 18.52%
Therefore option (d) is correct.
