Marge is lending Martin $1,000 for one year.The consumer price index is 160 at the time the loan is made and they expect it to be 176 in one year.If Marge and Martin agree that Marge should earn a 3% real return for the year,the nominal interest rate on this loan should be

Question

Quizplus · Accepted Answer

To find the nominal interest rate, we need to use the Fisher Effect equation:

Nominal interest rate = Real interest rate + Expected inflation

We know that Marge wants to earn a 3% real return, so the real interest rate is 3%. We also know that the expected inflation rate is 10% (176/160 - 1 = 0.1 or 10%).

Plugging in the values, we get:

Nominal interest rate = 3% + 10% = 13%

Therefore, the nominal interest rate on the loan should be 13%. Answer choice E is correct.

Marge Is Lending Martin $1,000 for One Year