If the real rate of interest is 2.1% and the expected inflation rate is 3.4%, then...

If the real rate of interest is 2.1% and the expected inflation rate is 3.4%, then what would be nominal interest rate?

Select one:

a. 5%

b. 6%

c. 5.57%

Expert Solution

Based on Fischer Relation,

(1 + Nominal rate) = (1 + Real Rate) * (1 + Inflation)

(1 + Nominal rate) = (1 + 2.1%) * (1 + 3.4%)

(1 + Nominal rate) = 1.021 * 1.034 = 1.0557

Nominal rate = 0.0557

Nominal rate = 5.57%

jeff jeffy answered 2 years ago

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