Suppose that the nominal rate of interest is 6 percent and the inflation premium is 1 percent. What is the real interest rate? Alternatively, assume that the real interest rate is 3 percent and the nominal interest rate is 8 percent. What is the inflation premium?

5% ; 5%

Explanation:

(1.)

Given the following :

Nominal interest rate = 6%

Inflation premium = 1%

Recall :

Nominal interest rate = real interest rate + inflation premium

Thus;

Real interest rate =Nominal interest rate - inflation premium

Real interest rate = 6% - 1%

Real interest rate = 5%

(2.)

Real interest rate = 3%

Nominal interest rate = 8%

Inflation premium = Nominal interest rate - Real interest rate

Inflation premium = 8% - 3%

Inflation premium = 5%

e would be the answer