Hi, i’ve been working on the examples where we have to convert from nominal rate to real rate. Sometimes the answer key uses (1+Nominal) = (1+r)(1+I), other times it uses Real = Nominal - Inflation. could someone please clarify when to use which equation? Thanks
The latter equation is also stated as (rearranged) Nominal = Real + Inflation (Approximately). The same is just an approximation of the first one. Us the latter one as an approximation…generally the question will say approximate versus calculate.
One is the linear approximation (Real = Nominal - inflation OR Nominal = Real + inflation) The other is the exact method (1+n) = (1+r)(1+i) I would suggest using exact unless it asks for linear approx. The answers provided won’t be so close (imo) that using one over the other would screw you up.
nice Bton, i did read the question again and it seems like they do ask for approximate or calculate… maybe that is the trick. Thanks!