Macroeconomics for Today (MindTap Course List)
Macroeconomics for Today (MindTap Course List)
9th Edition
ISBN: 9781305507142
Author: Irvin B. Tucker
Publisher: Cengage Learning
Question
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Chapter 7, Problem 5SQ
To determine

Find out the real interest rate from nominal interest rate.

Expert Solution & Answer
Check Mark

Answer to Problem 5SQ

Option ‘d’ is correct.

Explanation of Solution

Option (d):

The real rate of interest can be calculated as follows:

Real Interest Rate=Nominal Interest RateInflation3=963=3

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

Option (a):

Real Interest Rate=Nominal Interest RateInflation5=965>3

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

Option (b):

Real Interest Rate=Nominal Interest RateInflation15=9615>3

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

Option (c):

Real Interest Rate=Nominal Interest RateInflation16=9616>3

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.

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