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The real rate of interest equals 5.0% and the anticipated rate of inflation is 2.0%. What...

The real rate of interest equals 5.0% and the anticipated rate of inflation is 2.0%. What does the nominal rate of interest​ equal?  

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Answer #1

The nominal interest rate is the rate of I teresa that does not take into account the inflation rate that is to be xpected within the period of the loan. This question can be approached using the fisher equation which will provide us with the relationship between the two values and how correct the rate using the correction for inflation. In easier terms, the real interest rate is calculated by the equation

REAL INTEREST RATE = NOMINAL INTEREST RATE - INFLATION RATE.

Therefore

NOMINAL RATE OF INTEREST = REAL RATE OF INTEREST + INFLATION

NRI = 5%+2% = 7%.

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