If inflation is anticipated to be 5 per cent during the next year, while the real rate of interest for a one-year loan is 5 per cent, then what should the nominal rate of interest be for a risk-free one-year loan?

Question

Quizplus · Accepted Answer

The nominal interest rate can be approximated by adding the real interest rate to the expected inflation rate. Therefore, 5% (real interest rate) + 5% (inflation rate) = 10%.

If Inflation Is Anticipated to Be 5 Per Cent During