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) $6 \%$

Question

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) $6 \%$

Accepted Answer

∻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.⚹◊What formula can be used to calculate the nominal interest rate based on the given information?⍭ Generate me a similar question◊

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