BUISENESS MANAGEMENT
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The real rate is 2.50% and inflation is 3.25%. What is the approximate nominal rate?
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5.65%
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5.25%
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3.25%
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5.75%
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Explanation:
Detailed explanation-1: -The GDP deflator is (nominal GDP/real GDP) x 100, and it tells you how much inflation is. For example, if nominal GDP is $105 and real GDP is $100, then inflation is 5%.
Detailed explanation-2: -3%. On solving the above equation we get, real interest rate (r%) = 2.94%, which can be rounded up to 3%.
Detailed explanation-3: -Unlike the nominal rate, the real interest rate takes the inflation rate into account. The equation that links nominal and real interest rates can be approximated as nominal rate = real interest rate + inflation rate, or nominal rate-inflation rate = real interest rate.
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