1 answer

If you lend money at a 12% nominal interest rate, but you expect inflation to be...

Question:

If you lend money at a 12% nominal interest rate, but you expect inflation to be 7% over the life of the loan, then you expect your purchasing power to grow at a rate of [1%. The real interest rate is negative when the nominal interest rate is If the nominal interest rate is 3% and the expected rate of inflation is 1%, then the real interest rate is ▼| the inflation rate. A. 2%. O B. 096. 3%. 1%. С. OD, E. -196.
If you lend money at a 12% nominal interest rate, but you expect inflation to be 7% over the life of the loan, then you expect your purchasing power to grow at a rate of [1%. The real interest rate is negative when the nominal interest rate is If the nominal interest rate is 3% and the expected rate of inflation is 1%, then the real interest rate is ▼| the inflation rate. A. 2%. O B. 096. 3%. 1%. С. OD, E. -196.

Answers

1. Given that,

Nominal interest rate=12%

Inflation rate. =7%

purchasing power to grow at rate = Nominal interest rate divided by expected inflation rate.

i.e purchasing power grow at rate of=12/7

=1.7%.

2. The real interest rate os negative when the nominal interest rate is "less than" the inflation rate.

3. If the nominal interest rate is 3% and the expected inflation rate is 1% then real interest rate is,

Real interest rate = Nominal interset rate - Inflation rate.

i.e Real Interest rate = 3%-1%

=2%.

.

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