The formula given was: (real rate of interest) = (nominal rate of interest) - (expected rate of inflation)

A chartered bank offers a one-year loan at "3 points above prime." Prime is 4 per cent.

a) What is the nominal interest rate?
b)If expected inflation is 3 per cent for next year, what is the real rate of interest?
c) Suppose inflation rises to 4 per cent. What is the real rate of interest?

Can you show me how to do this with all steps included? Pleasee.

Of course! I'd be happy to guide you through the steps to find the answers to these questions.

a) To find the nominal interest rate, we need to calculate the annual rate that the chartered bank offers, given that it is "3 points above prime." Since prime is 4%, we can add the 3 points (3%) to the prime rate:

Nominal interest rate = Prime rate + 3 points
Nominal interest rate = 4% + 3%
Nominal interest rate = 7%

Therefore, the nominal interest rate is 7%.

b) To find the real rate of interest, we need to use the formula: Real rate of interest = Nominal rate of interest - Expected rate of inflation.

Given that the expected rate of inflation is 3%, we can substitute these values into the formula:

Real rate of interest = 7% - 3%
Real rate of interest = 4%

Therefore, the real rate of interest is 4%.

c) If inflation rises to 4%, we can repeat the process to find the new real rate of interest:

Real rate of interest = Nominal rate of interest - Expected rate of inflation
Real rate of interest = 7% - 4%
Real rate of interest = 3%

Therefore, if inflation rises to 4%, the new real rate of interest would be 3%.

These are the steps to calculate the nominal rate of interest, the real rate of interest with an expected rate of inflation of 3%, and the real rate of interest with an expected rate of inflation of 4%.