The little-known monarchy of Gerberovia recently had a nominal interest rate of 300 percent and an inflation rate of 280 percent. According to Equation 6.7, the real interest rate is:

How do we know that the second formula is indeed the exact one? Let’s think in terms of hamburgers again. Had you deposited $1,000 in a Gerberovian bank a year ago, the account would be worth $4,000 [ = $1,000 × (1 + 3 ) ] today. However, while a hamburger cost $1 a year ago, it costs $3.80 (= $1 + 2.8) today. Therefore, you would now be able to buy 1,052.6 (= $4,000 / $3.80) hamburgers, a real interest rate of 5.26 percent.

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300% 280% = 20% (Approximate formula) However, according to Equation 6.6, this rate is: 1+ 3 1 + 2.8 1 = .0526, or 5.26% (Exact formula)