Assume you are lending money to a friend for a year and want to earn real interest of 5 percent on the loan.If you believe the inflation rate the next year will be 3 percent,you should charge your friend a nominal interest rate of
A) 5 percent
B) 8 percent
C) 3 percent
D) 15 percent
E) whatever he will pay

Question

Quizplus · Accepted Answer

To earn a real interest rate of 5% with an expected inflation rate of 3%, you should charge a nominal interest rate of 8% (5% real interest + 3% inflation).

Assume You Are Lending Money to a Friend for a Year