If Inflation Is Anticipated to Be 5 Per Cent During

question 5

Multiple Choice

If inflation is anticipated to be 5 per cent during the next year,while the real rate of interest for a one-year loan is 5 per cent,then what should the nominal rate of interest be for a risk-free one-year loan?

• A)25 per cent.
• B)10 per cent.
• C)5 per cent.
• D)none of the above.

---

Definitions:

International Fisher Effect

A theory stating that the difference in nominal interest rates between two countries is equal to the expected change in their exchange rates.

Inflation Rate

The pace at which prices for general goods and services escalate, causing a decline in the ability to purchase.

Treasury Bill

Short-term government securities with maturity periods of one year or less, sold at a discount from face value.

Canadian Dollars

The recognized monetary unit of Canada, symbolized by CAD or C$.