With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of:
A) 2 percent
B) 4 percent
C) 6 percent
D) 10 percent

Question

Quizplus · Accepted Answer

If the inflation rate is expected to be 4%, the bank would want to protect their profits from being reduced by inflation. To do so, they would add the expected inflation rate to their interest rate. Therefore, in this scenario, the bank would charge an interest rate of 10% (6% + 4%).

With No Inflation, a Bank Would Be Willing to Lend