Question

You have just taken a job at a bank in the loans department. Your bank is worried about the current economic climate and the potential to limit the real rate of interest they will earn on new loans. Turning to you, the head of the department asks you to determine the proper nominal rate of interest to ensure a 5% real rate of interest. You say that you have to know what inflation will be. You are told that the current inflation rate is 1%.

You suggest a nominal interest rate of_______ %

Answer 1

6%

Step-by-step explanation:

Nominal interest rate = real interest rate + inflation rate

5% + 1% = 6%

Nominal interest rate is the rate of interest that is calculated without adjusting for inflation rate.

Real interest rate is the rate of interest that is calculated adjusting for inflation. Inflation rate is substracted from the nominal interest rate to service the real interest rate

Inflation rate measures the percentage change in the general price levels over a period of time.