If the nominal interest rate is 10 percent and the real interest rate is 6 percent,
A)The expected rate of inflation is 4 percent.
B)The expected rate of inflation is 6 percent.
C)Real GDP must exceed nominal GDP.
D)Nominal GDP equals real GDP.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the expected rate of inflation from the nominal interest rate. Therefore, if the nominal interest rate is 10 percent and the real interest rate is 6 percent, the expected rate of inflation is 4 percent (10% - 6% = 4%).

If the Nominal Interest Rate Is 10 Percent and the Real