Question

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is

A. 2 percent.
B. 8 percent.
C. 10 percent.
D. 12 percent.

Answer 1

The real interest rate is D) 12%.

Step-by-step explanation:

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the nominal interest rate is 2% and the expected inflation rate is -10%. To find the real interest rate, we subtract -10% from 2%:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Real Interest Rate = 2% - (-10%)

Real Interest Rate = 2% + 10%

Real Interest Rate = 12%

Therefore, the real rate of interest is 12%, which means that after accounting for inflation, the interest rate is 12%.