Question

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:________.A. 8 percent. B. 5 percent. C. 3 percent. D. 2 percent

Answer 1

Answer:

Inflation rate= 0.03 = 3%

Explanation:

Giving the following information:

Nominal interest rate= 0.05

Real interest rate= 0.02

To calculate the inflation rate, we need to use the following formula:

Real interest rate= nominal interest rate - inflation rate

Inflation rate= nominal interest rate - real interest rate

Inflation rate= 0.05 - 0.02

Inflation rate= 0.03 = 3%

Answer 2

The formula to calculate Inflation rate is to subtract Real Interest rate from the nominal interest rate. The result we will find is Inflation rate at 3%. Thus option C.

Inflation rate

In the given question we are provided with nominal interest rate at 5% and the real Interest rate at 2%. And we have to find the Inflation rate.

The formula for calculating Real interest rate is to subtract inflation rate from nominal interest rate. We can change it to:

⇒ Inflation rate= nominal interest rate - real interest rate

⇒ Inflation rate= 0.05 - 0.02

⇒ Inflation rate= 0.03 = 3%

Thus, we get option C right.

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