Answer to Question #76813 in Macroeconomics for joseph sagoe

Question

the consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5%. what is the real interest rate during this period?

Answer 1

CPI data: Year 2006 = 225
Year 2007= 234
Nominal Interest rate = 6.5%
Hence, inflation rate in this period =[CPI (2007) – CPI (2006)]*100 / CPI (2006)
= [234-225]*100 / 225
= 4%
Using Fisher Equation for low inflation level,
Real interest rate during the period = Nominal interest rate – inflation rate
= 6.5-4.0
=2.5%