Question

If the nominal interest rate equals 5 percent and expected inflation is 3 percent, then the new nominal and real interest rates are respectively:

a) 3% and 5%.
b) 8% and 5%.
c) 5% and 2%.
d) 5% and 7%.
e) 7% and 5%

Answer 1

c) 5% and 2%.

Step-by-step explanation:

Given that

Nominal interest rate = 5%

Expected inflation = 3%

We know that

Real interest rate = Nominal interest rate - inflation rate

= 5% - 3%

= 2%

And the new nominal rate is equal to given nominal interest rate i.e 5%

Therefore, we consider all information which is mentioned in the question.