Comparing the situation of a nominal interest rate of 10 percent and an inflatio

Question

Comparing the situation of a nominal interest rate of 10 percent and an inflation rate of 9 percent with a nominal interest rate if 6 percent and inflation rate 2, consumers would borrow more in which situation?
A. Nominal Interest rate of 10 percent since real interest rate is 1 percent.
B. Nominal interest rate of 10 percent since the real interest rate is 9 percent
C. Nominal interest rate of 6 percent since the real interest rate is 2 percent
D. Nominal interest rate of 6 percent since the real interest rate is 4 percent Comparing the situation of a nominal interest rate of 10 percent and an inflation rate of 9 percent with a nominal interest rate if 6 percent and inflation rate 2, consumers would borrow more in which situation?
A. Nominal Interest rate of 10 percent since real interest rate is 1 percent.
B. Nominal interest rate of 10 percent since the real interest rate is 9 percent
C. Nominal interest rate of 6 percent since the real interest rate is 2 percent
D. Nominal interest rate of 6 percent since the real interest rate is 4 percent
A. Nominal Interest rate of 10 percent since real interest rate is 1 percent.
B. Nominal interest rate of 10 percent since the real interest rate is 9 percent
C. Nominal interest rate of 6 percent since the real interest rate is 2 percent
D. Nominal interest rate of 6 percent since the real interest rate is 4 percent

Explanation / Answer

A. Nominal Interest rate of 10 percent since real interest rate is 1 percent

Real interest rate = (1 +0.10)/(1+0.09) - 1 = 0.01 = 1%

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