Marge is lending Martin $1,000 for one year.The CPI is 1.60 at the time the loan is made.They expect it to be 1.76 in one year.If Marge and Martin agree that Marge should earn a 3% real return for the year, the nominal interest rate on this loan should be ______ percent.
A)3
B)7
C)13
D)16

Question

Quizplus · Accepted Answer

The nominal interest rate can be calculated using the formula: nominal rate = real rate + inflation rate. The inflation rate is calculated as (1.76 - 1.60) / 1.60 = 0.1 or 10%. Therefore, the nominal rate = 3% + 10% = 13%.

Marge Is Lending Martin $1,000 for One Year