If nominal interest = 2% and expected inflation = –10%, real interest is:

Question

BlackTom AI · Accepted Answer

Using the Fisher equation (approximation), real interest ≈ nominal interest − expected inflation. This is the relevant concept: nominal rate is the stated percentage, expected inflation reduces (if positive) or increases (if negative/deflation) the real return in purchasing-power terms.

1) Relevant knowledge points and concepts
- Fisher approximation: real ≈ nominal − inflation (works well when rates are not large).
- Exact Fisher relation: 1 + nominal = (1 + real) × (1 + inflation), so real = (1 + nominal)/(1 + inflation) − 1.

2) Step-by-step reasoning (approximate method used because the question expects the simple subtraction form)
- Given nominal interest = 2% and expected inflation = −10% (this is deflation of 10%).
- Apply the approximation: real ≈ 2% − (−10%).

3) Calculations with intermediate steps
- Subtracting a negative: 2% − (−10%) = 2% + 10% = 12%.

4) Why the correct answer is correct
- Deflation (negative inflation) raises the real return: the purchasing power of money increases, so a 2% nominal return combined with 10% deflation yields about a 12% real return. This matches choice b.

5) Why the other options are incorrect
- a. 2%: This is the nominal rate without adjusting for inflation/deflation, so it ignores the −10% inflation and is wrong.
- c. 8%: No standard calculation yields 8% from 2% nominal and −10% inflation; it would correspond to 2% − (−?) = 8% (i.e., if inflation were −6%), so incorrect.
- d. 10%: This might arise from taking the absolute value of inflation alone, but it ignores the nominal rate, so incorrect.

(For completeness: exact Fisher gives real = 1.02/0.90 − 1 = 0.1333... ≈ 13.33%, but the multiple-choice standard uses the approximation nominal − inflation, giving 12%.)

Conclusion: The correct answer is b. 12%, which matches the provided answer.

If nominal interest = 2% and expected inflation = –10%, real interest is:Single choice

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