Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be – 2 percent next year. By approximately how much will Jimmer’s real income change next year?
1 answer
Question:
Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be – 2 percent next year. By approximately how much will Jimmer’s real income change next year?
Answers
Answer:Nominal interest rate (n) = 10% = 0.10Inflation rate (i) = -2% = -0.02 Real interest rate (r) = ? Application of Fisher's Equation (I + n) = (1 + r)(1 + i)(1 + 0.10) = (1 + r)(1 + -0.02) 1.10 = (1 + r)(0.98)1.10 = 1 + r0.981.1224 = 1 + r1.1224 - 1 = r r = 0.1224 = 12.24% Jimmer's real income will change by 12.24% next year. Explanation:In the determination of the rate of change in real income, there is need to apply Fisher's equation. The nominal rate and inflation rate have been given, thus, we will make the real rate the subject of the formula.
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