If the price level increases by 80% in one year, then for the real rate of interest to be 10%, the nominal rate of interest would have to be
A)98%.
B)70%.
C)18%.
D)88%.
E)72%.

Question

Quizplus · Accepted Answer

The nominal interest rate can be calculated using the formula: nominal rate = real rate + inflation rate. Here, the real rate is 10% and the inflation rate is 80%, so the nominal rate = 10% + 80% = 90%. However, due to compounding, the exact nominal rate is calculated as (1 + real rate) * (1 + inflation rate) - 1 = (1 + 0.10) * (1 + 0.80) - 1 = 0.98 or 98%.

If the Price Level Increases by 80% in One Year