Investors of government bonds require an 8% per annum real return.The inflation rate (CPI)is 5.50%.What is the exact nominal rate?

Question

Quizplus · Accepted Answer

The nominal rate can be found using the real rate and inflation rate as follows:

Nominal rate = (1 + real rate) x (1 + inflation rate) - 1

Substituting the given values:

Nominal rate = (1 + 0.08) x (1 + 0.055) - 1
Nominal rate = 1.1394 - 1
Nominal rate = 0.1394 or 13.94%

Therefore, the best choice is C.

Investors of Government Bonds Require an 8% Per Annum Real