Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect inﬂation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a
Nominal interest rate of
A) 2 percent.
B) 3 percent.
C) 5 percent.
D) 7 percent.

Question

Quizplus · Accepted Answer

To calculate the nominal interest rate, we add the expected inflation rate to the desired real rate of interest. So, nominal interest rate = real rate of interest + expected inflation. In this case, nominal interest rate = 5% + 2% = 7%. Therefore, lenders should charge a nominal interest rate of 7 percent.

Suppose That Lenders Want to Receive a Real Rate of Interest