If a bank posts a nominal interest rate of 4 percent,and inflation is expected to be 3 percent,then
A)the expected real interest rate is 7 percent.
B)the expected real interest rate is 1 percent.
C)the expected real interest rate is 1.33 percent.
D)the expected real interest rate is 12 percent.

Question

Quizplus · Accepted Answer

The expected real interest rate is calculated as nominal interest rate minus expected inflation rate. Therefore, in this case, the expected real interest rate is 4 percent - 3 percent = 1 percent (Choice B).

If a Bank Posts a Nominal Interest Rate of 4