Question

Statistics

Posted 4 months ago

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The Iron Bank wants to make sure that the purchasing power of the interest that they get paid on loans is at least $11 \%$. Real GDP is increasing at $5 \%$ per year, and the expected rate of inflation is $7 \%$ per year.
If all banks in Westeros want to earn the same real return as the Iron Bank, what is the nominal interest rate (n.i.r)?
Choose 1 answer:
(A) $11 \%$
(B) $16 \%$
(c) $2 \%$
(D) $18 \%$
(E) $6 \%$
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Answer from Sia

Posted 4 months ago

Solution by Steps

step 1

To calculate the nominal interest rate (n.i.r), we use the Fisher equation, which relates the real interest rate (r), the nominal interest rate (i), and the inflation rate (π): $i = r + π$

step 2

Given that the real interest rate the Iron Bank wants to ensure is $11\%$ and the expected inflation rate is $7\%$, we substitute these values into the Fisher equation: $i = 11\% + 7\%$

step 3

Adding the real interest rate and the inflation rate: $i = 18\%$

∻Answer∻

The nominal interest rate (n.i.r) that all banks in Westeros would need to charge to earn the same real return as the Iron Bank is $18\%$

D

Key Concept

Fisher Equation

Explanation

The Fisher equation is used to calculate the nominal interest rate based on the desired real interest rate and the expected inflation rate.

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