To find the inflation rate given the nominal interest rate and the real interest rate, we can use the Fisher equation, which states:
\[ (1 + i) = (1 + r)(1 + \pi) \]
Where:
- \( i \) = nominal interest rate
- \( r \) = real interest rate
- \( \pi \) = inflation rate
For small values, we can approximate the equation as:
\[ i \approx r + \pi \]
Rearranging this gives us:
\[ \pi \approx i - r \]
Plugging in the given values:
- Nominal interest rate (\( i \)) = 5% or 0.05
- Real interest rate (\( r \)) = 7% or 0.07
Now substituting these values:
\[ \pi \approx 0.05 - 0.07 = -0.02 \]
This corresponds to an inflation rate of -2 percent. Therefore, the answer is:
b. −2 percent.