Prices have been rising 8 percent a year for ten years.The nominal interest rate is 12 percent.The real rate of interest is

Question

Quizplus · Accepted Answer

To determine the real rate of interest, we need to adjust the nominal interest rate for inflation. Using the formula: 
Real Interest Rate = Nominal Interest Rate - Inflation Rate
We can calculate the inflation rate using the rule of 72: 
72 / 8 = 9 years (time it takes for prices to double) 
So, the inflation rate is 100% / 9 = 11.11%
Substituting in the formula: 
Real Interest Rate = 12% - 11.11% = 0.89% or 0.0089 as a decimal 
Therefore the real rate of interest is 0.0089 x 100 = 0.89%, or expressed as a percentage the answer is 4%.

Prices Have Been Rising 8 Percent a Year for Ten