Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know that the inflation rate increases to 10 percent. What is the new nominal interest rate?
A) 3 percent
B) 13 percent
C) 11 percent
D) 8 percent

Question

Quizplus · Accepted Answer

The Fisher equation states that the nominal interest rate is the sum of the real interest rate and the expected inflation rate. Initially, the real interest rate is 3% (8% nominal - 5% inflation). With the inflation rate rising to 10%, the new nominal interest rate would be 13% (3% real + 10% inflation).

Initially the Nominal Interest Rate Is 8 Percent and the Inflation