Question

What is the rate of inflation if a savings account has a nominal interest rate 3% and a real interest rate of 1%.

Answer 1

Answer:

The correct answer is that the rate of inflation is 2%.

Step-by-step explanation:

Real = nominal - inflation  

Inflation = Nominal - Real

Inflation = 3% - 1% = 2%

In general, the nominal quantities are those in «gross». Precisely, what the real magnitudes do is subtract the effect of inflation from the nominal magnitude.  When speaking in real terms, it refers to base year prices. That is, a specific year is set as a reference and the prices of the base year of the products to be studied are taken. In this way, the effect of inflation is excluded in the studies. The process to convert a nominal value to real terms is precisely called inflation adjustment. And thanks to this adjustment, real values are an excellent measure of net purchasing power, regardless of price changes over time.

Answer 2

Answer:

Rate of inflation is 4%

Step-by-step explanation:

Given:

Nominal interest rate =3%

Real interest rate=1%

To Find:

Rate of inflation=?

Solution:

Nominal interest rate:

Nominal interest rate refers to the interest rate before taking inflation into account.

Inflation rate:

The inflation rate is the percent increase or decrease in prices during a specified period. It's usually over a month or a year.

Real interest rate:

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.

Real interest rate ≈ nominal interest rate − inflation rate.

This can be re written as

inflation rate= Real interest rate - nominal interest rate

Substituting the values,

inflation interest = 1+3

inflation interest=4%