Early in the 1980s, nominal interest rates on mortgages hovered in the 13 percent range even while inflation fell to the 5 percent range. Given the expectation that the Fed would keep inflation at 5 percent, a reasonable estimate of the real rate of interest would be
A) 4 percent.
B) 5 percent.
C) 8 percent.
D) 13 percent.
E) 18 percent.

Question

Quizplus · Accepted Answer

The real rate of interest can be estimated by subtracting the inflation rate from the nominal interest rate. In this case, 13% (nominal rate) - 5% (inflation rate) = 8%.

Early in the 1980s, Nominal Interest Rates on Mortgages Hovered