Assume that in 2016,prices increased by 2% over the previous year and the nominal rate of interest was 8%.In 2017,prices increased by 5%.If the real rate of interest is to remain at the same level in 2017 as it was in 2016,then what should the nominal interest rate in 2017 be?

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. In 2016, the real interest rate was 8% - 2% = 6%. If the real interest rate is to remain the same in 2017, then the nominal interest rate must increase by the same amount as the inflation rate. In 2017, the inflation rate is 5%, so the nominal interest rate must increase by 5% to 13%.

Assume That in 2016,prices Increased by 2% Over the Previous