To calculate the real interest rate, you can use the Fisher equation, which is:
\[ (1 + i) = (1 + r)(1 + \pi) \]
where:
- \( i \) is the nominal interest rate,
- \( r \) is the real interest rate, and
- \( \pi \) is the expected inflation rate.
For small values, you can also use the approximation:
\[ r \approx i - \pi \]
Given:
- Nominal interest rate (\( i \)) = 8% or 0.08,
- Expected inflation (\( \pi \)) = 2.5% or 0.025.
Using the approximation:
\[ r \approx 0.08 - 0.025 \] \[ r \approx 0.055 \text{ or } 5.5% \]
So the real interest rate is approximately \( 5.5% \).
The correct answer is: b. 5.5 percent
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