An investor wants to be able to buy 4% more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2%. Which statement(s) below is/are true?
I. 4% is the desired real rate of interest
II. 6% is the approximate nominal rate of interest required
III. 2% is the expected inflation rate over the period

Question

Quizplus · Accepted Answer

The investor wants a 4% increase in purchasing power, which is the real rate. The nominal rate is approximately the real rate plus inflation, so 4% + 2% = 6%. The expected inflation rate is given as 2%.

An Investor Wants to Be Able to Buy 4% More