Instructions: Round your answer to one decimal place. If the inflation premium is 2 percent and the nominal interest rate is 1 percent, what is the real interest rate? % What if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent? %

a. - 1%

b. - 2.5%

Explanation:

According to fisher equation: Real interest rate = Nominal rate - Inflation. Inflation reduces the value of money over time, that is the reason why is needed to be considered in the calculation of interest rates.

x = 1% - 2% = - 1%

B. x = 0.5% - 3% = - 2.5%