##### Homework question help needed

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If a nominal rate of interest is 13.36%, and the real rate of interest is 8.96%. What is the expected rate of inflation?

Jul 2nd, 2015

Thanks for the opportunity to answer your question!

Once again, when we need to find the expected interest rate, we may use an augmented version of the Fisher equation.

real interest rate = r
nominal interest rate = i
expected rate of inflation = e

The Fisher equation thus reads:

1 + = (1 + r) * (1 + e)

In substituting i with 13.36 and r with 8.96, we obtain the following equation:

1 + 13.36 = (1 + 8.96) * (1 + e)

14.36 = (9.96) * (1 + e)

14.36 / 9.96 = e + 1

1.44 = e + 1

1.44 - 1 = e

e = 0.44

0.44% is your expected rate of inflation. Hope this helps!

Please let me know if you need any further clarification :)
Jul 2nd, 2015

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Jul 2nd, 2015
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Jul 2nd, 2015
Oct 23rd, 2017
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