If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that:
A)Is at least 7%
B)Is anything above 0%
C)Equals the real rate desired plus expected inflation
D)Equals the real rate desired less expected inflation

Question

Quizplus · Accepted Answer

The nominal interest rate should equal the desired real interest rate plus expected inflation in order to compensate for the expected decrease in purchasing power due to inflation. Therefore, the nominal interest rate should be 3% (desired real rate) + 3% (expected inflation) = 6%.

If a Lender Wants to Earn a Real Interest Rate