The annual rate of inflation averaged 2 percent during the past decade, but borrowers and lenders anticipate that the price level will rise at a rate of 3 percent next year. The current nominal interest rate is 7 percent. The real rate of interest is

Question

Quizplus · Accepted Answer

The real rate of interest is the nominal rate of interest minus the expected rate of inflation. In this case, the nominal rate of interest is 7 percent and the expected rate of inflation is 3 percent, so the real rate of interest is 7 percent - 3 percent = 4 percent.

The Annual Rate of Inflation Averaged 2 Percent During the Past