People expect an inflation rate of 5 percent and the real interest rate is positive. Then the nominal interest rate will be
A) 5 percent.
B) less than 5 percent.
C) more than 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

Nominal interest rate is equal to the real interest rate plus the expected inflation rate. Since the real interest rate is positive and the expected inflation rate is 5 percent, the nominal interest rate will be more than 5 percent.

People Expect an Inflation Rate of 5 Percent and the Real