Suppose the Nominal Annual Interest Rate on a Two-Year Loan

question 246

Multiple Choice

Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years.The annual real rate of interest is

• A)6 percent.
• B)8 percent.
• C)2 percent.
• D)3 percent.

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Definitions:

Budgeted Net Income

The estimated amount of money expected to be earned over a specific period after all expenses are subtracted.

Variable Costs

Costs that change in proportion to the level of production or business activity.

Fixed Costs

Expenses that do not vary with the volume of output, including costs like rent, salaries, and insurance premiums.

Net Income

The total earnings of a company after subtracting all expenses, taxes, and costs, indicating its profitability.