A bank would like to make a 2% real return on its car loans. The expected inflation rate is 4%. What rate should the bank charge?
A) 2%
B) 4%
C) 6%
D) 8%

Question

Quizplus · Accepted Answer

To achieve a 2% real return with an expected inflation rate of 4%, the bank should use the Fisher equation, which is approximately: nominal interest rate = real interest rate + inflation rate. Therefore, the bank should charge 6% (2% real return + 4% inflation = 6%).

A Bank Would Like to Make a 2% Real Return