Suppose that, initially, the nominal interest rate is 6 percent and the inflation rate is 3 percent. If the inflation rate increases to 6 percent, what will be the new nominal interest rate?
A) 6 percent
B) 1 percent
C) 11 percent
D) 9 percent

Question

Quizplus · Accepted Answer

The nominal interest rate is adjusted for inflation using the Fisher equation: nominal interest rate = real interest rate + inflation rate. Initially, the real interest rate is 3% (6% nominal - 3% inflation). If inflation increases to 6%, the new nominal interest rate would be 3% (real) + 6% (inflation) = 9%.

Suppose That, Initially, the Nominal Interest Rate Is 6 Percent