If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment?
If the rate of inflation is 5 %5%, what nominal interest rate is necessary for you to earn a 3 %3% real interest rate on your investment?
To determine the nominal interest rate needed to earn a specific real interest rate, you can use the Fisher equation. The Fisher equation states that the nominal interest rate (i) is equal to the sum of the real interest rate (r) and the expected rate of inflation (π). Mathematically, it can be represented as:
i = r + π
In this case, you want to earn a 3% real interest rate while the rate of inflation is 5%. Therefore, you can substitute the given values into the equation to find the nominal interest rate (i):
i = 3% + 5%
i = 8%
So, to earn a 3% real interest rate when the rate of inflation is 5%, you would need a nominal interest rate of 8%.