Chapter 7, Problem 5SQ

To determine

Find out the real interest rate from nominal interest rate.

Answer to Problem 5SQ

Option ‘d’ is correct.

Explanation of Solution

Option (d):

The real rate of interest can be calculated as follows:

$\begin{array}{l}\text{Real Interest Rate}=\text{Nominal Interest Rate}-\text{Inflation}\\ 3=9-6\\ 3=3\end{array}$

The calculated value of real interest rate is equal to the given value of 3 percent. Thus, option 'd' is correct.

Option (a):

$\begin{array}{l}\text{Real Interest Rate}=\text{Nominal Interest Rate}-\text{Inflation}\\ 5=9-6\\ 5>3\end{array}$

The calculated value of real interest rate is less than the given value of 5 percent. Thus, option 'a' is incorrect.

Option (b):

$\begin{array}{l}\text{Real Interest Rate}=\text{Nominal Interest Rate}-\text{Inflation}\\ 15=9-6\\ 15>3\end{array}$

The calculated value of real interest rate is less than the given value of 15 percent. Thus, option ‘b’ is incorrect.

Option (c):

$\begin{array}{l}\text{Real Interest Rate}=\text{Nominal Interest Rate}-\text{Inflation}\\ 16=9-6\\ 16>3\end{array}$

The calculated value of real interest rate is less than the given value of 6 percent. Thus, option ‘c’ is incorrect.

Economics Concept Introduction

Nominal interest rate: Nominal interest rate refers to the actual amount of money paid by the debtors to the creditors on a fixed amount of money.

Real interest rate: Real interest rate refers to the nominal interest rate which can be adjustable with inflation.

Inflation: Inflation refers to a continuous increase in the average price level in an economy.