Inflation and interest rates Assume the expected inflation r

(Inflation and interest rates) Assume the expected inflation rate is 4.2 percent. If the current real rate of interest is 6.8 percent, what should the nominal rate of interest be? The nominal rate of interest should be.%. (Round to two decimal places.)

Solution

(1+real rate)=(1+nominal rate)/(1+inflation rate)

(1+0.068)=(1+nominal rate)/(1+0.042)

1+nominal rate=(1.068*1.042)

nominal rate=(1.068*1.042)-1

which is equal to

=11.29%(Approx).