Question

Nominal Interest Rate =__________

• A. Real Interest Rate × Inflation Rate
• B. Real Interest Rate – Inflation Rate
• C. Real Interest Rate / Inflation Rate
• D. Real Interest Rate + Inflation Rate

Answer 1

The Correct Option is D

The nominal interest rate is calculated using the Fisher equation. This economic principle posits that the nominal interest rate equals the sum of the real interest rate and the inflation rate. The formula is:

Nominal Interest Rate = Real Interest Rate + Inflation Rate

Definitions:

• Real Interest Rate: The interest rate adjusted for inflation, representing the actual cost of borrowing or return on savings.
• Inflation Rate: The percentage increase in the general price level of goods and services, indicating a decrease in purchasing power.
• Nominal Interest Rate: The stated interest rate prior to accounting for inflation, typically quoted by financial institutions.

In essence, to ascertain the nominal interest rate, add the real interest rate to the inflation rate. The governing formula is:

Nominal Interest Rate = Real Interest Rate + Inflation Rate