If the real interest rate is 7 percent and the expected inflation rate is 2 percent, what would a person expect to have after a year?

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the expected inflation rate. In this case, the real interest rate is 7% - 2% = 5%. This means that the person can expect to have 5% more dollars after a year. However, the expected inflation rate is 2%, which means that the purchasing power of those dollars will decrease by 2%. Therefore, the person can expect to have 5% more dollars, which will purchase 5% more goods.

If the Real Interest Rate Is 7 Percent and the Expected