Suppose That a Bank Wishes to Make a 5% Rate

question 120

Multiple Choice

Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects inflation over the course of the loan to be roughly 3%. Which of the following is TRUE?

• A)As long as the bank charges a nominal interest rate of at least 5%, it will earn its expected return.
• B)If the bank charges an interest rate of 8% or higher, it will earn the expected return.
• C)If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected.
• D)If the bank charges 8% and the inflation rate is more than 3%, then the bank will have earned a higher rate of return than expected.

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