If the nominal interest rate is 8% and the risk-free rate is 3%, the expected inflation rate must be:
A)3%
B)5%
C)11%
D)cannot be determined without additional information

Question

Quizplus · Accepted Answer

The expected inflation rate can be calculated by subtracting the risk-free rate from the nominal interest rate. Therefore, 8% - 3% = 5%. So, the expected inflation rate is 5%. Choice A is not correct because it only represents the risk-free rate. Choice C is incorrect because it is higher than the nominal interest rate, which doesn't make sense. Choice D is incorrect because we have enough information to calculate the expected inflation rate.

If the Nominal Interest Rate Is 8% and the Risk-Free