Given Information:
Nominal Interest Rate = 6.3 %
Inflation Rate = 1.7 %
Required Information:
approximate real rate of interest?
exact real rate of interest?
Answer:
approximate real rate of interest = 4.6%
exact real rate of interest = 4.5%
Explanation:
Nominal Interest Rate: The interest rate that a person earn or pay on a loan.
Real Interest Rate: The nominal interest rate after adjusting for inflation.
Relation between Nominal and Real Interest Rate: The fisher equation
Real Interest Rate = Nominal Interest Rate - Inflation Rate
approximate real rate of interest = 6.3% - 1.7% = 4.6%
exact real rate of interest = (1 + 0.063)/(1 + 0.017) = 1.045 = 4.5%
