Answer:
Inflation rate= 0.03 = 3%
Explanation:
Giving the following information:
Nominal interest rate= 0.05
Real interest rate= 0.02
To calculate the inflation rate, we need to use the following formula:
Real interest rate= nominal interest rate - inflation rate
Inflation rate= nominal interest rate - real interest rate
Inflation rate= 0.05 - 0.02
Inflation rate= 0.03 = 3%
The formula to calculate Inflation rate is to subtract Real Interest rate from the nominal interest rate. The result we will find is Inflation rate at 3%. Thus option C.
In the given question we are provided with nominal interest rate at 5% and the real Interest rate at 2%. And we have to find the Inflation rate.
The formula for calculating Real interest rate is to subtract inflation rate from nominal interest rate. We can change it to:
⇒ Inflation rate= nominal interest rate - real interest rate
⇒ Inflation rate= 0.05 - 0.02
⇒ Inflation rate= 0.03 = 3%
Thus, we get option C right.
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