If banks need to receive a 4 percent real interest rate on h

If banks need to receive a 4 percent real interest rate on home mortgage loans, what nominal interest rate must they charge if they expect the inflation rate to be 1.5 percent? 0-15% 0 1.5% 2.5% o 4% 5.5%

Solution

Correct option is (5).

Expected nominal interest rate = Real interest rate + Expected Inflation rate = 4% + 1.5% = 5.5%