What is the nominal rate of interest if the real interest rate is 4% and expected inflation is 3%?

7% ARE YOU KIDDING ME?

Inflation makes everything go down in value compared to the money you have today. My $100 today buys me 100 shmounces (I made up a new unit to make the math easy) of gold. In one year with 3% inflation it will take $103 to buy those same 100 schmounces of gold.

If you are borrowing the money then the cost is 4% and you get the benefit of not losing the 3% that you would have lost if you waited, so 4%-3%= 1% nominal. You pay the 4% in interest rates and the 3% in the amount it didn%26#039;t go down in value because you got to enjoy the fruits right now.

If you are saving the money then it is 4%-3%=1%. You are paid the 4% interest rate which buys you 3% less when you do spend it.

As you can see inflation helps you in one case and hurts you in the other but the nominal rate is still the same. Weird huh?

Its all about the math.

What is the nominal rate of interest if the real interest rate is 4% and expected inflation is 3%?

4+3=7%. But to be more correct, there is a formula.

Real= (Nominal - Inflation)/(1+Inflation)

What is the nominal rate of interest if the real interest rate is 4% and expected inflation is 3%?

Formula is Real rate of interest = (Nominal rate of interest - Inflation rate)/(1+Inflation rate).

For lay man use and for cosidering lesser number of years, Nominal rate = Real rate + inflation rate

In this case, Nominal rate of interest is 4+3 = 7%