Question

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 4 percent. But if the rate of inflation was anticipated to be 3 percent, the bank would most likely charge the firm an annual interest rate of Multiple Choice 1 percent. 7 percent. 3 percent. 4 percent.

Answer 1

Answer:

b.  7 percent

Explanation:

Annual interest to charge = Interest rate + Rate of inflation anticipation

Annual interest to charge = 4% + 3%

Annual interest to charge = 7%

The bank would most likely charge the firm an annual interest rate of 7% due to the anticipation of inflation.