If the inflation rate is expected to be 2 percent and creditors will lend only if the real interest rate is 3 percent, the nominal interest rate will be
A) 1 percent.
B) 5 percent.
C) 7 percent.
D) 12 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate can be approximated by adding the expected inflation rate to the real interest rate. Therefore, 2% (inflation rate) + 3% (real interest rate) = 5% (nominal interest rate).

If the Inflation Rate Is Expected to Be 2 Percent