Suppose You Are a Lender and You Expect Inflation to Be

Multiple Choice

Suppose you are a lender and you expect inflation to be 4 percent over the next year because inflation was 4 percent in the last year. If you want to earn a real return of 2 percent on any loans you make, you will set the interest rate on your loans equal to:

A) 2 percent.
B) 4 percent.
C) 6 percent.
D) 10 percent.