If a lender charged a 9 percent nominal interest rate and the expected inflation rate is 4 percent,what is the difference between the real rate the lender received and the real rate the lender expected when actual inflation ended up being 2 percent?
A) 2 percent
B) 4 percent
C) -4 percent
D) 1 percent
E) 0 percent

Question

Quizplus · Accepted Answer

The expected real interest rate is the nominal rate minus the expected inflation rate, which is 9% - 4% = 5%. The actual real interest rate is the nominal rate minus the actual inflation rate, which is 9% - 2% = 7%. The difference between the actual real rate and the expected real rate is 7% - 5% = 2%.

If a Lender Charged a 9 Percent Nominal Interest Rate