The nominal interest rate is equal to the
A)real interest rate minus the inflation premium.
B)real interest rate minus the trailing inflation rate.
C)real interest rate plus the expected interest rate increase.
D)real interest rate plus the expected inflation rate.

Question

Quizplus · Accepted Answer

Nominal interest rate is the sum of the real interest rate and the expected inflation rate. Option D captures this relationship. Option A is incorrect because inflation premium is added to real interest rate to get the nominal interest rate. Option B is incorrect because trailing inflation rate is not a relevant factor in determining the current nominal interest rate. Option C is incorrect because expected interest rate increase does not affect the current nominal interest rate but rather the expected future interest rate.

The Nominal Interest Rate Is Equal to the