Asked by Jayla Ashley on May 07, 2024
Verified
If the annual real rate of interest is 6%, and the expected inflation rate is 2%, the nominal rate of interest would be approximately
A) 1%.
B) 8%.
C) 20%.
D) 15%.
Real Rate
The interest rate adjusted for inflation, representing the real cost of borrowing or the real yield on an investment.
Expected Inflation
The rate at which it is forecasted that the general level of prices for goods and services will rise over a period of time.
Nominal Rate
The interest rate before adjustments for inflation, indicating the gross rate of return on an investment.
- Comprehend the fundamentals of nominal, real, and after-tax interest rates.
Verified Answer
DB
Dominik Barto?May 09, 2024
Final Answer :
B
Explanation :
The nominal interest rate can be approximated using the Fisher equation: nominal rate ≈ real rate + inflation rate. Therefore, 6% (real rate) + 2% (inflation rate) = 8%.
Learning Objectives
- Comprehend the fundamentals of nominal, real, and after-tax interest rates.