Engineering economic class Q4 4 If the real interest rate is

4. If the real interest rate is 7% and the inflation rate is 5%, what is the market interest rate? (10 pts, no partial credit) A. 12.35% B. 11.65% C. 16.63% D. 13.84% Assume that over the past eight years, prices have ine inflation rate is compounded annually. Compute your reased by a total of 65%. what is the annual inflation rate? The answer to the nearest 0.01%. (10 pts, no partial credit)

Solution

Market interest rate is the nominal interest rate.

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

1 + market rate = 1.05 * 1.07 = 1.1235

Market rate = 0.1235 or 12.35% ie choice a.