If the nominal interest rate on a one-year loan was 7%,the expected inflation rate over the year was 3% and the actual inflation rate over the year turned out to be 3.5%,then the expected real interest rate equals
A)6)5%.
B)4)0%.
C)3)75%.
D)3)5%.

Question

Quizplus · Accepted Answer

The expected real interest rate can be calculated as follows:
Expected Real Interest Rate = Nominal Interest Rate - Expected Inflation Rate
= 7% - 3%
= 4%
However, since the actual inflation rate turned out to be 3.5%, the actual real interest rate is:
Actual Real Interest Rate = Nominal Interest Rate - Actual Inflation Rate
= 7% - 3.5%
= 3.5%
Therefore, the expected real interest rate was slightly higher than the actual real interest rate, which means that borrowers benefited slightly more than lenders from the inflation. Choice B is the closest to the expected real interest rate of 4%.

If the Nominal Interest Rate on a One-Year Loan Was