Question
Given that the money discount rate is 19% and Inflation is 12%, what will be the real rate of interest?
Solution
Nominal rate or money discount rate + 1 = (1 + Inflation Rate) * (1 + Real Rate) Thus, Real rate = (1+ Money rate)/ (1+ inflation rate) - 1 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = (1+ 19%)/ (1+12%) -1 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 1.19%/1/12% -1 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â = 6.25%
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