If inflation is anticipated to be 5 per cent during the next year, while the real rate of interest for a one-year loan is 5 per cent, then what should the nominal rate of interest be for a risk-free one-year loan?
A) 5 per cent
B) 10 per cent
C) 25 per cent
D) none of the above

Question

Quizplus · Accepted Answer

The nominal interest rate equals the sum of the real interest rate and the expected inflation rate. Therefore, the nominal interest rate for a risk-free one-year loan should be: 
Nominal interest rate = Real interest rate + Expected inflation rate 
Nominal interest rate = 5% + 5% = 10% 
Thus, the answer is B.

If Inflation Is Anticipated to Be 5 Per Cent During