If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?
A) 5 percent.
B) 10 percent.
C) 25 percent.
D) None of the above.

Question

Quizplus · Accepted Answer

The nominal interest rate can be calculated as follows:
nominal interest rate = real interest rate + expected inflation rate
In this case, the real interest rate is 5 percent and the expected inflation rate is also 5 percent, so the nominal interest rate should be 10 percent.

If Inflation Is Anticipated to Be 5 Percent During the Next