If you as a lender want an increase in purchasing power of 4 percent from making a loan and you set the nominal interest rate at 9 percent, then your
A)real rate of interest is 13 percent.
B)expected rate of inflation is 5 percent.
C)expected rate of inflation is 13 percent.
D)real rate of interest is 36 percent.

Question

Quizplus · Accepted Answer

The real rate of interest is equal to the nominal rate of interest minus the expected rate of inflation. Therefore, real rate of interest = 9% - 5% = 4%. Since the lender wants an increase in purchasing power of 4%, this means that he wants to earn a real rate of interest of 4%. Therefore, the expected rate of inflation must be equal to the nominal rate minus the desired real rate, which is 9% - 4% = 5%.

If You as a Lender Want an Increase in Purchasing