Question

Suppose that the one-year real interest rate in period 0 is 12% and that the inflation rate is 4.5%. So the nominal interest rate is?

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Answer to a math question Suppose that the one-year real interest rate in period 0 is 12% and that the inflation rate is 4.5%. So the nominal interest rate is?

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Seamus

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98 Answers

1 + i = (1 + 0.12)(1 + 0.045)

1 + i = 1.12 \cdot 1.045

1 + i = 1.1694

i = 1.1694 - 1

i = 0.1694

i \approx 0.1704 \quad \text{or} \quad 17.04\%

The nominal interest rate, given a real interest rate of 12% and an inflation rate of 4.5%, is approximately 17.04%.

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