Suppose the GDP deflator in 2016 is 265 and the GDP deflator

Suppose the GDP deflator in 2016 is 265 and the GDP deflator in 2017 is 300. Also, let the real interest rate during this period be 3%. What was the nominal interest rate from 2016 to 2017?

Select one:

a. 16%

b. 2%

c. 7%

d. 13%

Solution

Answer
Inflation=(GDP deflator in 2017 - GDP deflator in 2016)/GDP deflator in 2016
=(300-265)/265
=0.13207547169
=13.21%
The nominal interest rate=real interest rate+inflation
=0.03+0.13207547169
=0.162075472
=16.21%

Option a