Question

You have just taken a job at a bank in the loans department. Your bank is worried about the current economic climate and its potential to limit the real rate of interest the bank will earn on new loans. The head of the department asks you to determine the proper nominal rate of interest to ensure a 6% real rate of interest, and tells you that the current inflation rate is 4%. You suggest a nominal interest rate of_____% .

Answer 1

Answer:

10.24%

Explanation:

We can use fisher formula to calculate the real rate of return. The fisher equation is given as under:

(1 + i) = (1 + r) * (1 + h)

Here

Nominal Interest Rate is i

Real Interest Rate is r and is 6%

And Current Inflation Rate is 4%

By putting values, we have:

(1 + i) = (1 + 6%) * (1 + 4%)

(1 + i) = (1.06) * (1.04)

(1 + i) = 1.1024

i = 1.1024  - 1 = 10.24%

The nominal interest rate that I would suggest is 10.24%.