The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest rate is approximately ________ percent a year; and when the inflation rate is 2 percent a year, the nominal interest rate is approximately ________ percent a year.
A) 0; 2
B) 4; 6
C) 6; 8
D) 6; 4

Question

Quizplus · Accepted Answer

The nominal interest rate can be approximated by adding the real interest rate to the inflation rate. Therefore, with a 0% inflation rate, the nominal rate is 4% (real rate), and with a 2% inflation rate, the nominal rate is approximately 6% (4% real rate + 2% inflation).

The Real Interest Rate Is 4 Percent a Year