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

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Business

Bailee

29 January, 03:52

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

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Seth Frank · Answer 1

d. 4 percent

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%