 Ask Remember Me? Loretta 27 Posts: 1, Reputation: 1 New Member #1 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:
HELP>>>> ArcSine Posts: 969, Reputation: 106 Senior Member #2 Oct 16, 2009, 12:01 PM
Using the decimal versions of your values...

0.074 = k + 0.045 + 0.045k

Then,
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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