Question

Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to
remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:
a. 2 percent.
b. 3 percent.
c. 5 percent.
d. 7 percent.

Answer 1

Answer:

The answer is: D) 7 percent

Explanation:

Real interest rates are nominal interest rates discounted by inflation. To calculate them we just simply deduct inflation from nominal interest rate: Nominal interest rates - inflation rate = real interest rate.

For this case the nominal interest rate = real interest rate +  inflation rate = 5% + 2% = 7%