An investor requires a 3 percent increase in purchasing power in order to induce her to lend. She expects inflation to be 2 percent next year. The nominal rate she must charge is about

Question

Quizplus · Accepted Answer

The nominal rate charged is equal to the real interest rate (3%) plus the expected inflation rate (2%), which equals 5%. Therefore, the investor would need to charge a nominal rate of 5% in order to achieve a 3% increase in purchasing power.

An Investor Requires a 3 Percent Increase in Purchasing Power