If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is

Question

a. 3 percent.
b. 6 percent.
c. 9 percent.
d. 18 percent.
e. none of the above.

Answer 1

To calculate the real interest rate, you can use the Fisher equation, which states:

\[ 1 + r = \frac{1 + i}{1 + \pi} \]

Where:

• \( r \) is the real interest rate,
• \( i \) is the nominal interest rate,
• \( \pi \) is the inflation rate.

For small rates, a simplified version can be used:

\[ r \approx i - \pi \]

In this case:

• Nominal interest rate \( i = 6% \) or 0.06
• Inflation rate \( \pi = 3% \) or 0.03

Using the simplified formula:

\[ r \approx 0.06 - 0.03 = 0.03 \text{ or } 3% \]

Therefore, the real interest rate is approximately 3 percent. The correct answer is:

a. 3 percent.