Connect FINANCE Review Questions ch 678 Question 21 of 30 In

Connect FINANCE Review Questions (ch. 6,7,8) Question 21 (of 30) Inflation was 2% last year. Thomas forecasts that inflation is going to ncrease to 4% this year. Based on this forecast Thomas most ikety belleves thar O The nominal interest rate will increase. O The real rate will decrease and the nominal rate will increase ?? The real rate will decrease O The real rate will increese O The nominal rate will decrease. ? 8 9

Solution

Answer: The nominal interest rate will increase.

Explanation:

The nominal interest rate is given by the formula

Nominal interest rate = (1+real rate of interest)*(1+inflation rate)-1

Hence, nominal rate of interest will increase when inflation rate increases.