Suppose the Bank of Montreal wants a four percent real rate of return on all its loans, and anticipates an annual inflation rate of six percent. It should therefore lend its money at a nominal interest rate of
A)ten percent.
B)nine percent.
C)five percent.
D)four percent.
E)one percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is calculated by adding the real rate of return to the anticipated inflation rate. Therefore, 4% (real rate) + 6% (inflation rate) = 10% nominal interest rate.

Suppose the Bank of Montreal Wants a Four Percent Real