According to the Fisher equation,if a bank extends a loan for 3 percent and the inflation rate ends up being 5 percent,the ________ interest rate is ________ percent.
A) nominal; 2
B) real; 2
C) nominal; -2
D) real; -2
E) nominal; 8

Question

Quizplus · Accepted Answer

According to the Fisher equation, nominal interest rate = real interest rate + inflation rate. Rearranging, real interest rate = nominal interest rate - inflation rate. In this case, if the nominal interest rate is 3% and the inflation rate is 5%, then the real interest rate is -2%. Negative real interest rates indicate that the borrower is actually paying back less in real terms than they borrowed, which can be beneficial for borrowers but detrimental for savers or lenders. Therefore, the best choice is D.

According to the Fisher Equation,if a Bank Extends a Loan