The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest rate?
A) 3%
B) 5%
C) 8.15%
D) 2%

Question

Quizplus · Accepted Answer

The nominal interest rate equals the real interest rate plus the inflation rate, so in this case, nominal interest rate = 3% + 5% = 8%. However, we need to take into account compounding, so we use the formula (1 + r_nominal) = (1 + r_real) x (1 + inflation_rate). Plugging in the values, we get (1 + r_nominal) = (1 + 0.03) x (1 + 0.05), which simplifies to 1 + r_nominal = 1.08. Solving for r_nominal, we get 0.0815 or 8.15%, which is closest to choice C. Therefore, the correct answer is C.

The Real Interest Rate Is 3% and the Inflation Rate