If a lender wants a real return of 6 percent and she expects inflation to be 4 percent,which of the following is the correct nominal interest rate to charge?
A) 4 percent
B) 6 percent
C) 2 percent
D) 10 percent
E) -2 percent

Question

Quizplus · Accepted Answer

The nominal interest rate is equal to the real interest rate plus the expected inflation rate. So, nominal interest rate = real interest rate + expected inflation rate. In this case, the real interest rate is 6 percent and the expected inflation rate is 4 percent, so nominal interest rate = 6 percent + 4 percent = 10 percent.

If a Lender Wants a Real Return of 6 Percent