In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the US....

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Question

In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the US. What was the real interest rate in 1975?

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Answer 1

Answer #1

Real interest rate = [(1 + interest rate) / (1 + inflation)] - 1

Real interest rate = [(1 + 0.0785) / (1 + 0.123)] - 1

Real interest rate = [1.0785 / 1.123] - 1

Real interest rate = 0.960374 - 1

Real interest rate = -0.0396 or -3.96%

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Answer 2

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