Suppose the Bank of Montreal wants a 4% real rate of return on all its loans,and anticipates an annual inflation rate of 6%.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

The nominal interest rate can be approximated by adding the real interest rate to the expected inflation rate. Therefore, 4% (real rate) + 6% (inflation rate) = 10% (nominal rate).

Suppose the Bank of Montreal Wants a 4% Real Rate