Question

According to the Fisher equation, if the real rate of interest is 2.5% and the nominal rate of interest is 5.3%, the rate of inflation is forecast to be approximately 5.3%. 2.8%. 2.7%. 7.8%.

Answer 1

Answer:

Rate of inflation = 2.7(approx)

Explanation:

Given:

Real rate of interest (r) = 2.5% = 0.025

Nominal rate of interest (i) = 5.3% = 0.053

The rate of inflation(g) = ?

Computation:

$The real rate of interest = \frac{i-g}{1+g}\\\\0.025 = \frac{0.053-g}{1+g} \\0.025 + 0.025g = 0.053 -g\\0.025g + g = 0.053 - 0.025\\1.025g = 0.028\\g = 0.02731$

Therefore, rate of inflation = 2.7(approx)