Suppose That Lenders Want to Receive a Real Rate of Interest

question 254

Multiple Choice

Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect inflation to remain steady at 2 percent in the coming years.Based on this, lenders should charge a nominal interest rate of

• A)2 percent.
• B)3 percent.
• C)5 percent.
• D)7 percent.

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Definitions:

Interest Rate

The percentage at which interest is paid by borrowers for the use of money that they borrow from a lender.

Profit

The financial gain that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Borrow

To receive something, especially money, from a person or financial institution with the agreement to return it, typically with interest, at a future date.

Gross Domestic Product (GDP)

The nation’s expenditure on all the goods and services produced in the country during the year at market prices; represented by GDP.