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If the inflation rate was 2.40% and the nominal interest rate was 7.20% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. k 6.00% O4.08% O4.80%

If the inflation rate was 2.40% and the nominal interest rate was 7.20% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. k 6.00% O4.08% O4.80%

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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INTEREST RATE, r (Percent) 16 0 D S2 CAPITAL (Billions of dollars) $1 8 +. Equilibrium
Transcribed Image Text:INTEREST RATE, r (Percent) 16 0 D S2 CAPITAL (Billions of dollars) $1 8 +. Equilibrium
If the inflation rate was 2.40% and the nominal interest rate was 7.20% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. O 6.00% O4.08% O4.80% O 5.52%
Transcribed Image Text:If the inflation rate was 2.40% and the nominal interest rate was 7.20% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. O 6.00% O4.08% O4.80% O 5.52%
Expert Solution
Introduction,

The equation states that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate. The real interest rate is the nominal interest rate adjusted for inflation, or the rate at which the purchasing power of an investment increases. The Fisher equation is used to calculate the real rate of return on an investment by subtracting the expected inflation rate from the nominal interest rate.

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