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

According to the Fisher equation, the nominal interest rate equals the real interest rate plus the inflation rate.

Answer 2

According to the Fisher equation, the nominal interest rate is the sum of the real interest rate and the inflation rate. The equation is commonly expressed as:

\( i = r + \pi \)

Where:

• i is the nominal interest rate,
• r is the real interest rate, and
• \(\pi\) is the inflation rate.

The nominal interest rate is the interest rate that is observed in the market, without adjusting for inflation. The real interest rate, on the other hand, represents the rate of return on an investment after accounting for the effect of inflation. The inflation rate reflects the percentage change in the price level of goods and services over time.

The Fisher equation is crucial for understanding the relationship between these rates. It shows that when inflation rises, the nominal interest rate tends to increase as well to maintain the same real return for investors. This equation is widely used in finance and economics to analyze interest rates and the effects of inflation on investment and borrowing.