Samantha is lending Jack $1,000 for one year.The CPI is 1.60 at the time the loan is made, and they both expect it to be 1.68 in one year.If Samantha and Jack agree that Samantha should earn a 3% real return for the year, the nominal interest rate on this loan should be ______ percent.

Question

Quizplus · Accepted Answer

The nominal interest rate can be calculated using the formula: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). The expected inflation rate is (1.68/1.60) - 1 = 0.05 or 5%. Therefore, (1 + nominal rate) = (1 + 0.03) * (1 + 0.05) = 1.0815, which implies a nominal rate of approximately 8%.

Samantha Is Lending Jack $1,000 for One Year