If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent,what is the nominal interest rate?
A)4 percent
B)6 percent
C)8 percent
D)10 percent

Question

Quizplus · Accepted Answer

Nominal interest rate = real interest rate + expected inflation 
Expected inflation = -2% (as the price level is falling at a rate of 2%) 
Therefore, 
Nominal interest rate = 6% + (-2%) = 4%

If the Real Interest Rate Is 6 Percent and the Price