With 4% inflation and a nominal interest rate of .01, a person can trade off one unit of current consumption for ________ units of future consumption.
| 1 + nominal interest rate = (1+ real interest rate)*(1+ inflation) | |||||||||
| (1+.01) = (1+real interest rate)*(1+.04) | |||||||||
| (1+real interest rate) = (1.01)/(1.04) | |||||||||
| 1+ real interest rate = .971154 | |||||||||
| real interest rate = -.02885 | |||||||||
| The real interest rate is equal to -2.88% | |||||||||
| The equivalent of 1 unit of current consumption = (1+r)*1 units of future consumption | |||||||||
| where r is -2.88% | |||||||||
| (1+r)*1 = (1-.0288)*1 | |||||||||
| (1+r)*1 = .9712 | |||||||||
| A person can trade off one unit of current consumption for .9712 units of future consumption. | |||||||||
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