If a lender expects an inflation rate of 5% but the inflation rate unexpectedly increases to 7% and if the nominal interest rate was 10%,what is the real rate of interest earned?
A) 2%
B) 3%
C) 4%
D) 5%

Question

Quizplus · Accepted Answer

The real rate of interest is calculated as the nominal interest rate minus the expected inflation rate. 
Real interest rate = Nominal interest rate - Inflation rate 
In this case, 
Nominal interest rate = 10% 
Expected inflation rate = 5% 
Unexpected inflation rate = 7% 
Substituting the given values, we get, 
Real interest rate = 10% - 7% = 3% 
Therefore, the real rate of interest earned is 3%. 
Hence, the correct answer is option B.

If a Lender Expects an Inflation Rate of 5% but the Inflation