Question

If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?a. 8 percent b. 6 percent c. 10 percent d. 4 percent

Answer 1

d. 4 percent

Step-by-step explanation:

In order to find the nominal interest rate we will use the formula

(1+Real interest rate)=(1+nominal interest rate)/(1+Inflation)

The real interest rate is 6%, the inflation is negative 2% because prices are falling at a rate of 2% and we have to find the nominal interest rate. We will put these values in the formula.

1.06=(1+Nominal interest rate)/(0.98)

1.06*0.98=1+ nominal interest rate

1.0388-1=Nominal interest rate.

Nominal interest rate = 0.0388 or 3.88%

We can round that off to 4%