Suppose the Bank of Montreal wants a 5% real rate of return on all its loans,and anticipates an annual inflation rate of 4%.It should therefore lend its money at a nominal interest rate of
A)10%.
B)9%.
C)5%.
D)4%.
E)1%.

Question

Quizplus · Accepted Answer

To get a real rate of return of 5%, the nominal interest rate should be the real rate of return plus the inflation rate. Therefore, the nominal interest rate should be 5% + 4% = 9%.

Suppose the Bank of Montreal Wants a 5% Real Rate