If nominal interest rate equals 5 percent and expected inflation is 3 percent, then the new nominal and real interest rates are respectively: A) 3% and 5%. B) 8% and 5%. C) 5% and 2%. D) 5% and 7%. E) 7% and 5%.

C. Real Interest Rate = 2% and Nominal Rate = 5%

Explanation:

Given

Nominal Interest Rate = 5%

Expected Inflation Rate = 3%

Required

The new nominal rate

The real interest rate

First; We'll need to calculate the real interest rate

New Nominal Rate is calculated as thus;

Convert to Percentage

(Approximated)

answer; top-down processing;