Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know that the inflation rate increases to 10 percent. What is the new nominal interest rate?
A) 3 percent
B) 11 percent
C) 8 percent
D) 13 percent

Question

Quizplus · Accepted Answer

The Fisher equation states that nominal interest rate = real interest rate + inflation rate. In this case, the real interest rate is 3 percent (8 percent - 5 percent). If the inflation rate increases to 10 percent, then the nominal interest rate would be 13 percent (3 percent + 10 percent). Therefore, the answer is D.

Initially the Nominal Interest Rate Is 8 Percent and the Inflation