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    Loretta 27's Avatar
    Loretta 27 Posts: 1, Reputation: 1
    New Member

    Oct 16, 2009, 07:33 AM
    Nominal Rate of Interest vs Real Interest Rate
    I need to find for the real rate of Interest??

    Nominal Rate of Interest 7.4% and Inflations is 4.5%

    K = k* + I + (k*x I)

    7.4 = k* + 4.5% + (k* x 4.5%)

    I am trying to find for k*:confused:
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
    Senior Member

    Oct 16, 2009, 12:01 PM
    Using the decimal versions of your values...

    0.074 = k + 0.045 + 0.045k

    1) subtract 0.045 from both sides;
    2) re-express the new right-hand side as k(1 + 0.045); finally
    3) divide both sides by (1 + 0.045) to solve for k.

    To wrap it up, test your proposed answer in the fundamental relationship between the nominal rate N, the real rate k, and the inflation rate i, to make sure your answer for k satisfies the equation...

    (1 + N) = (1 + k)(1 + i)

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