Question

Calculate the nominal rate of interest given a real rate of 8% and an inflation rate of 2%.

Answer 1

When inflation rate is quite low then the nominal interest rate can calculated by following formula:

Nominal interest rate = Real interest rate + Inflation rate

= 8% + 2 %

= 10%.

As per formula Nominal interest rate:

(1+ Nominal interest rate) = (1+ real interest rate ) (1+inflation rate)

(1+ Nominal interest rate) = (1+0.08) (1+0.02)

1 + Nominal interest rate = 1.08 x 1.02

1 + Nominal interest rate = 1.1016

Nominal interest rate = 1.1016 - 1 = 0.1016 i.e. 10.16%