If the real interest rate is 5 percent and the nominal interest rate is 2 percent, this implies an expected inflation rate of
A) -7 percent.
B) -3 percent.
C) 3.5 percent.
D) 7 percent.

Question

Quizplus · Accepted Answer

The Fisher equation relates the nominal interest rate (i), the real interest rate (r), and the inflation rate (π) as follows: i = r + π. Given that the real interest rate is 5 percent and the nominal interest rate is 2 percent, solving for the inflation rate gives π = i - r = 2% - 5% = -3%.

If the Real Interest Rate Is 5 Percent and the Nominal