If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that:
A) is at least 7%.
B) is anything above 0%.
C) equals the real rate desired plus expected inflation.
D) equals the real rate desired less expected inflation.

Question

Quizplus · Accepted Answer

To earn a real interest rate of 3% when inflation is also 3%, the lender needs to charge a nominal interest rate that equals the real rate desired (3%) plus expected inflation (3%). Therefore, the nominal interest rate should be 6%.

If a Lender Wants to Earn a Real Interest Rate