Question

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But if the rate of inflation was expected to be 4%, the bank would most likely charge the firm an annual interest rate of rev:________________

Answer 1

Answer:

The nominal interest rate which the bank will offer is of 10.24%

Explanation:

according to Irwin formula the bank will charge a nominal rate that ensures a real rate of 6% thus:

$\frac{1+r_n}{1+ \theta} -1 =r_e$

$(1+r_e)(1+ \theta) -1 = r_n$

1.06*1.04-1 = 0.1024 = 10.24%