Alex expects the inflation rate to be 4%. If Alex borrows money at a nominal interest rate of 5%, his real interest rate is:
A)greater than the nominal interest rate.
B)less than the nominal interest rate.
C)equal to the nominal interest rate.
D)negative.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, 5% nominal interest rate minus 4% expected inflation rate equals a real interest rate of 1%, which is less than the nominal interest rate. Therefore, the correct answer is B.

Alex Expects the Inflation Rate to Be 4