How to Calculate the Inflation Rate Based on Interest Rates

What is the relationship between nominal interest rate, real interest rate, and inflation rate?

Calculate the inflation rate given the nominal interest rate of 7 percent and the real interest rate of -2.5 percent.

Answer:

Inflation = 9.5%

Explanation: Inflation can be defined as the persistent general rise in the price of goods and services in an economy at a specific period of time. The inflation rate is calculated by subtracting the real interest rate from the nominal interest rate.

Given the following data:

• Nominal interest rate = 7%
• Real interest rate = -2.5%

To calculate the inflation rate:

Inflation = Nominal interest rate - Real interest rate

Inflation = 7% - (-2.5%)

Inflation = 9.5%

Therefore, the inflation rate is 9.5%, indicating the expected increase in the prices of goods and services.