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Finding Real Interest Rates

In early 1996, the short-term interest rate in France was 5.7 percent, and forecast French inflation was 2.8 percent. At the same time, the short-term German interest rate was 2.6 percent and forecast German inflation was 1.6 percent.

What were the real interest rates in France and Germany? Why are they different?

Solution Preview

The real interest rate = ((1+n )/(1+i))-1
where n= nominal interest rate and i= inflation

Real ...

Solution Summary

This solution gives equations for finding interest rates.