Suppose that initially the nominal rate of interest is 8 percent and the expected of inflation is 5 percent. If the expected rate of inflation increases to 8 percent, what will be the new nominal interest rate?

Suppose that initially the nominal rate of interest is 8 percent and the expected of inflation is 5 percent. If the expected rate of inflation increases to 8 percent, what will be the new nominal interest rate?

A 3 percent

B 8 percent

C 11 percent

D 16 percent

Solution

Correct Answer: Option B