Celia wants to make an 8% real return on a loan that she is planning to make, and the expected inflation rate during the period of the loan is 5%. She should charge an interest rate of
A) 3%.
B) 5%.
C) 8%.
D) 13%.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. In this case, Celia wants an 8% real return and the expected inflation rate is 5%, so the nominal interest rate should be the sum of the real rate and the inflation rate: 8% + 5% = 13%. Therefore, Celia should charge an interest rate of 13%.

Celia Wants to Make an 8% Real Return on a Loan