In year 1 the price level is constant and the nominal rate of interest is 6 percent. But in year 2 the inflation rate is 3 percent. If the real rate of interest is to remain at the same level in year 2 as it was in year 1, then in year 2 the nominal interest rate must

Question

Quizplus · Accepted Answer

The real interest rate is adjusted for inflation, so if inflation is 3% and the real rate must stay the same, the nominal rate must increase by 3 percentage points to offset the inflation. This means if the nominal rate was 6% in year 1, it needs to be 9% in year 2 to maintain the same real interest rate, which is a 3 percentage point increase.

In Year 1 the Price Level Is Constant and the Nominal