Question

If lenders are seeking a 3% real interest rate, the inflation rate is expected to be 6%, and real GDP is growing at 4%, what nominal interest rate will lenders ask for? ______________ %.

Answer 1

Answer:

9%

Explanation:

Real interest rate is the difference between nominal interest rate and inflation rate (i.e. real interest rate = Nominal interest rate - rate of inflation).

Therefore, Nominal interest rate would be calculated by adding real interest rate of 3% to an inflation rate of 6%, which gives 9%.

While the nominal interest rate is the actual interest rate paid to investors, the real interest rate is what gets to to the investor's pocket in terms of purchasing power.