Suppose the 1-year nominal interest rate in Zooropa is 9%, and Zooropa's expected inflation rate is 4%. What is the real interest rate in Zooropa?
What will be an ideal response?
The expected real interest rate is approximately 9% - 4% = 5%. The correct computation is: (1 + 0.09) / (1 + 0.04) – 1 = 0.0481 or 4.81%.
Business
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