Question

If inflation is anticipated to be 6 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?

A) 6%
B) 11%
C) 5%
D) 12%

Answer 1

To calculate the nominal interest rate for a risk-free one-year loan with an anticipated inflation rate of 6% and a real interest rate of 5%, we add the two rates together to get 11%.

Step-by-step explanation:

To calculate the nominal interest rate for a risk-free one-year loan, we need to add the anticipated inflation rate to the real interest rate. In this case, the real interest rate is given as 5%, and the anticipated inflation rate is 6%. Adding these two together, the nominal interest rate for a risk-free one-year loan should be 11%.