Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect inflation to remain steady at 2 percent in the coming years.Based on this, lenders should charge a nominal interest rate of
A)2 percent.
B)3 percent.
C)5 percent.
D)7 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is the sum of the real interest rate and the expected inflation rate. Therefore, 5% (real rate) + 2% (expected inflation) = 7%.

Suppose That Lenders Want to Receive a Real Rate of Interest