An investor requires a 3% increase in purchasing power in order to induce her to lend. She expects inflation to be 2% next year. The nominal rate she much charge is about

Question

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The investor requires a 3% increase in purchasing power, which means she wants the nominal rate to be at least 3% higher than inflation. If she expects inflation to be 2%, then the nominal rate she must charge is 2% + 3% = 5%. Therefore, the correct answer is D) 5%.

An Investor Requires a 3% Increase in Purchasing Power in Order