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If the inflation rate is 3% and the nominal interest rate is 5%, what is the rea

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Question: If the inflation rate is 3% and the nominal interest rate is 5%, what is the real interest rate?

Options:

  1. 1%
  2. 2%
  3. 3%
  4. 4%

Correct Answer: 2%

Solution: 

Real Interest Rate = Nominal Interest Rate - Inflation Rate = 5% - 3% = 2%.

If the inflation rate is 3% and the nominal interest rate is 5%, what is the rea

Practice Questions

Q1
If the inflation rate is 3% and the nominal interest rate is 5%, what is the real interest rate?
  1. 1%
  2. 2%
  3. 3%
  4. 4%

Questions & Step-by-Step Solutions

If the inflation rate is 3% and the nominal interest rate is 5%, what is the real interest rate?
  • Step 1: Identify the nominal interest rate. In this case, it is 5%.
  • Step 2: Identify the inflation rate. In this case, it is 3%.
  • Step 3: Use the formula for real interest rate: Real Interest Rate = Nominal Interest Rate - Inflation Rate.
  • Step 4: Substitute the values into the formula: Real Interest Rate = 5% - 3%.
  • Step 5: Calculate the result: 5% - 3% = 2%.
  • Step 6: The real interest rate is 2%.
  • Real Interest Rate – The real interest rate adjusts the nominal interest rate to account for inflation, reflecting the true cost of borrowing and the true yield on savings.
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