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

The nominal interest rate is determined by the Fisher equation, which states that the 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 must be more than 5 percent.

People Expect an Inflation Rate of 5 Percent and the Real