The two-year interest rate is 13.8% and the expected annual inflation rate is 6.9%. a. What is the expected real interest rate

Real interest rate= -0.0048= -0.48%

Explanation:

Giving the following information:

The two-year interest rate is 13.8% and the expected annual inflation rate is 6.9%

First, we need to calculate the biannual inflation rate:

Biannual inflation rate= (1+r)^2 - 1

Biannual inflation rate= (1.069^2) - 1

Biannual inflation rate= 0.1428

Now, to calculate the real interest rate, we need to deduct from the nominal interest rate the effect of inflation:

Real interest rate= 0.138 - 0.1428

Real interest rate= -0.0048

The real interest rate is negative. It means that the purchasing power of an investment decrease due to the negative effect of inflation.

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