People expect an inflation rate of 5 percent and the real interest rate is positive. Then the nominal interest rate will be
A) less than 5 percent.
B) more than 5 percent.
C) 5 percent.
D) Without more information it is impossible to tell if the nominal interest rate will be more than, less than, or equal to 5 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is the sum of the real interest rate and the expected inflation rate. Since the real interest rate is positive and the expected inflation rate is 5 percent, the nominal interest rate must be greater than 5 percent in order to provide a positive real return. Therefore, the answer is B.

People Expect an Inflation Rate of 5 Percent and the Real