You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 10%. You should charge a nominal interest rate of
A) 0%.
B) 5%.
C) 10%.
D) 20%.

Question

Quizplus · Accepted Answer

To get a 10% real return, we must add the expected inflation rate of 10% to our nominal interest rate. Therefore, nominal interest rate = real interest rate + inflation rate or nominal interest rate = 10% + 10% = 20%.

You Want to Make a 10% Real Return on a Loan