A Firm Takes a 2-Year Loan at a Nominal Interest

Multiple Choice

A firm takes a 2-year loan at a nominal interest rate of 8 percent.It believes that the inflation rate will be 4 percent this year and 2 percent next year.What annual average real interest rate does the firm expect to pay?

A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent