The price level has been rising 5 percent a year for 10 years and is expected to continue to do so. The nominal rate of interest is 6 percent. The real rate of interest is

Question

Quizplus · Accepted Answer

The real rate of interest is calculated as nominal rate of interest minus the inflation rate. In this case, the inflation rate is given as 5 percent a year for 10 years and is expected to continue, so it is 5 percent. Therefore, the real rate of interest is 6 percent minus 5 percent, which equals 1 percent. Choice B is the only option with this answer.

The Price Level Has Been Rising 5 Percent a Year