The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest rate is approximately percent a year; and when the inflation rate is 2 percent a year, the nominal interest rate is approximately percent a year.
A) 0; 2
B) 6; 8
C) 6; 4
D) 4; 6

Question

Quizplus · Accepted Answer

We can use the fisher equation:

nominal interest rate = real interest rate + expected inflation

When the inflation rate is zero:

nominal interest rate = real interest rate + expected inflation 
nominal interest rate = 4% + 0 
nominal interest rate = 4%

When the inflation rate is 2%:

nominal interest rate = real interest rate + expected inflation 
nominal interest rate = 4% + 2% 
nominal interest rate = 6%

Therefore, the correct answer is D.

The Real Interest Rate Is 4 Percent a Year