Problem:
There are a number of different interest rate formulas find the "exact rate" and "approximate rate" for the following numbers
a i=4%, Inflation=2%
b. i=15%, inflation=11%
c. i=54%,Inflation rate=46%
The exact rate is :1The correct formula is 1 + r = (1 + i)/(1=P(e) ) where r i s the exact real interest rate, i is the observed current nominal interest rate and Pe is the expected rate of inflation.
The approximate rate is:
a. 2%
b. 4%
c 5%
What is the exact rate of interest for the above three?