If the inflation rate is 4% per year and the market interest rate is known to be 10% per year, what is the implied realinterest (inflation-free) rate in this inflationary economy?The implied real interest (inflation-free) rate is%. (Round to two decimal places.)

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Answered: If the inflation rate is 4% per year…

Advanced Engineering Mathematics

10th Edition

ISBN:9780470458365

Author:Erwin Kreyszig

Publisher:Erwin Kreyszig

Chapter2: Second-order Linear Odes

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"Back in my day..." Young people hate hearing older folks say how things were so much cheaper when they were young. A gallon of gas? 25 cents. A Coca-cola? 5 cents. A car? 500 bucks. These prices may seem cheap - but they were not - "back in the day." This is due to inflation. In a growing economy, most goods and services increase in price over time to the tune of 2%-3% each year. The key is that workers' wages also increase. Thus, a car may have only cost $500 at some point in the past, but the average worker's salary was much, much lower back then. The inflation formula can be used to predict the future price of a good or service. The inflation formula is given by FV PV (1 + r) where FV is the future value of the good or service, PV is the present value of the good or service, r is the inflation rate, andt is number of years desired.
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If the inflation rate is 4% per year and the market interest rate is known to be 10% per year, what is the implied real interest (inflation-free) rate in this inflationary economy? The implied real interest (inflation-free) rate is %. (Round to two decimal places.)