If lenders demand a real rate of return of 4 per cent and they expect inflation to be 5 per cent, then they should charge 9 per cent interest when they extend loans.

Question

Quizplus · Accepted Answer

Lenders need to charge interest that covers both their desired real rate of return and the expected inflation rate. In this case, adding the 4% real rate of return and 5% inflation rate gives a total of 9% interest that lenders should charge on loans.

If Lenders Demand a Real Rate of Return of 4