If the inflation rate was 3.40% and the nominal interest rate was 5.60% 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.

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AyAyCapitan AyAyCapitan · Answer 1 · 2019-07-10T04:15:34+02:00

Answer:

2.1276%

Explanation:

[tex]\ $Real Rate$ = \frac{1+nominal}{1+inflation} - 1 [/tex]

1.056/1.034 -1 = 0,021276595744681 rounding to 4 decimal places:

2.1277%

The reasoning behind this formula is the following:

there is a rate that generate the combine effect of the nominal and the inflation rate

Principal (1+real rate) = Principal x (1+nominal) / (1+ inflation)

removing the principal for clearence:

1+real rate =(1+nominal) x (1+ inflation)

real rate = (1+nominal) x (1+ inflation) - 1

fichoh fichoh · Answer 2 · 2021-10-12T13:01:07+02:00

The real rate of interest obtained using the re rate of return relation is 0.5%

Given the Parameters :

To obtain the real rate, we use the relation :

Real rate = [(1 + nominal rate) ÷ (1 + inflation rate)] - 1

Inputting the Values into the formula :

Real rate = [(1 + 5.60) ÷ (1 + 3.40)] - 1

Real rate = (6.60 / 4.40) - 1

Real rate = 1.5 - 1

Real rate = 0.5%

Therefore, the real rate of interest is 0.5%

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