With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6 percent.But if the rate of inflation was anticipated to be 4 percent, 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.Difficulty: 02 Medium

Question

Quizplus · Accepted Answer

The bank would adjust the nominal interest rate to account for the anticipated inflation to maintain its real interest rate. With 4% anticipated inflation, the bank would charge 6% + 4% = 10%.

With No Inflation, a Bank Would Be Willing to Lend