Question

For a real interest rate of 12% per year and an inflation rate of 7% per year, the market interest rate per year is closest to:______

a. 4.7%
b. 7%
c. 12%
d. 19.8%

Answer 1

Answer: 19.8%

Step-by-step explanation:

Interest rate = 12%

Inflation rate = 7%

Market Interest rate will be:

= 12% + 7% + 12%(7%)

= 0.12 + 0.07 + 0.12(0.07)

= 0.12 + 0.07 + 0.0084

= 0.1984

= 19.84%

Therefore, the market interest rate per year is closest to 19.8%