Asked by Michael Megler on May 07, 2024
Verified
If the nominal rate of interest is 12 percent and the real rate of interest is 3 percent,then the expected rate of inflation is
A) 18%.
B) 15%.
C) 12%.
D) 9%.
E) 3%.
Nominal Rate
The interest rate before adjustments for inflation, representing the face value of financial products.
Real Rate
The interest rate that has been adjusted for inflation, reflecting the true cost of borrowing or the actual earnings on an investment.
Expected Rate
The anticipated return or yield on an investment or savings account, often based on historical data or statistical analysis.
- Calculate the real rate of interest and understand the relationship between nominal interest rates, real interest rates, and inflation.
Verified Answer
JC
Jenny CernaMay 10, 2024
Final Answer :
D
Explanation :
The expected rate of inflation can be found by subtracting the real rate of interest from the nominal rate of interest. Therefore, expected rate of inflation = nominal rate of interest - real rate of interest = 12% - 3% = 9%. Hence, the correct choice is D.
Learning Objectives
- Calculate the real rate of interest and understand the relationship between nominal interest rates, real interest rates, and inflation.