Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent.Everything else the same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the nominal interest rate is
A) 4 percent.
B) 10 percent.
C) 3 percent.
D) 8 percent.
E) 12 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is the real interest rate plus the inflation rate. Therefore, if the real interest rate is 6 percent and the inflation rate is 2 percent, the nominal interest rate must be 8 percent in order to maintain the desired real interest rate of 6 percent. Therefore, the best choice is D) 8 percent.

Barbara Is Willing to Loan $10,000 If She Can Earn