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Initially the nominal interest rate is 8 percent and the inflation rate is 6 percent. One year later, the nominal interest rate rises to 12 percent while the inflation rate rises to 10 percent. It follows that the real rate of interest:
Suggested Answer: A
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Choice 'a' is correct. The real interest rate equals the nominal interest rate minus the inflation rate. Thus, the real interest rate in the first year is: real interest rate = 8 6 = 2 and the real interest rate in the next year is: real interest rate = 12 10 = 2.
19 comments · newest first
SA
Samira
12 days ago
Yeah, we have enough info to decide.
ME
Merilyn
17 days ago
Option D doesn’t make sense here.
BA
Bambi
22 days ago
Exactly, it’s all about purchasing power.
DU
Dustin
28 days ago
Right, the real rate can't rise with higher inflation.
GI
Gilberto
1 month ago
It’s definitely not option C.
SA
Samira
1 month ago
I lean towards option B as well.
DU
Dustin
1 month ago
True, but not enough to offset inflation.
BA
Bambi
2 months ago
But the nominal rate increased too!
ME
Merilyn
2 months ago
Agreed, inflation is higher now.
DU
Dustin
2 months ago
I think the real rate has fallen.
FA
Fabiola
2 months ago
It’s B for sure, inflation went up more than nominal!
CA
Casandra
2 months ago
Definitely not the same, that's for sure.
SE
Sean
2 months ago
Wait, how can we be sure?
HO
Hoa
3 months ago
I think it has fallen, right?
VI
Vincent
3 months ago
Real interest rate is calculated by subtracting inflation from nominal rate.
CA
Callie
3 months ago
I believe the real interest rate has fallen since the inflation rate increased more than the nominal rate. But I should double-check my notes on this!
AS
Asuncion
3 months ago
I’m a bit confused about the calculations. If both rates are rising, does that mean the real rate stays the same?
RI
Richelle
3 months ago
I remember a practice question where the nominal rate increased but the inflation rate increased even more, which led to a lower real interest rate. This seems similar.
VI
Viva
4 months ago
I think the real interest rate is calculated by subtracting the inflation rate from the nominal rate, but I'm not completely sure how it changes over time.