If the long-term real interest rate is 5.1%,the term structure effect is 2.0%,the default-risk premium is 1.7%,and the expected rate of inflation is 3.3%,the short-term nominal interest rate will be
A) -1.9%.
B) 4.7%.
C) 5.5%.
D) 12.1%.

Question

Quizplus · Accepted Answer

Short-term nominal interest rate = Real rate + Expected inflation + Term structure effect + Default-risk premium
= 5.1% + 3.3% + 2.0% + 1.7%
= 12.1%
Therefore, the short-term nominal interest rate will be 4.7% (subtracting the term structure effect of 2.0% from the calculation above).

If the Long-Term Real Interest Rate Is 5