Question

This year is the base year for computing the nation's price index. The current nominal interest rate is 6 per cent, and the real interest rate is 3.5 per cent. What is the anticipated value of next year's price index?

Short answer

the anticipated value of next year's price index is$102.5$

Step-by-step solution

introduction

The Nominal Interest Rate is the pace of revenue paid on stores and charged on advances by a bank. It isn't adapted to expansion. Anticipated Inflation alludes to nonstop expansion in the costs of products over the long run. Expected expansion alludes to an expansion that is predicted by individuals before it happens.

explanation

Calculating the next year's price index

Expected inflation = nominal interest rate - real interest rate

$$\begin{gathered} =6\mathrm{\%}-3.5\mathrm{\%} \\ =2.5\% \end{gathered}$$

Calculating the anticipated value of next year's price index

the price index of base year $+$expected inflation

$\begin{array}{r}=100+2.5\\ =102.5\end{array}$