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If the nominal interest rate is [tex]$4.00 \%$[/tex] and the rate of inflation is [tex]$2.25 \%$[/tex], what is the real interest rate?

A. [tex]1.75 \%[/tex]
B. [tex]4.50 \%[/tex]
C. [tex]6.25 \%[/tex]
D. [tex]9.00 \%[/tex]

Sagot :

GinnyAnsweridn
To determine the real interest rate given a nominal interest rate and an inflation rate, we use the Fisher equation. The Fisher equation is given by:

[tex]\[ \text{Real Interest Rate} = \text{Nominal Interest Rate} - \text{Inflation Rate} \][/tex]

Here's the step-by-step solution:

1. Identify the nominal interest rate, which is 4.00%.
2. Identify the inflation rate, which is 2.25%.
3. Subtract the inflation rate from the nominal interest rate to find the real interest rate:

[tex]\[ \text{Real Interest Rate} = 4.00\% - 2.25\% \][/tex]

4. Perform the subtraction:

[tex]\[ 4.00\% - 2.25\% = 1.75\% \][/tex]

Therefore, the real interest rate is [tex]\(1.75\%\)[/tex].

So, the correct answer is:
[tex]\[ \boxed{1.75\%} \][/tex]
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