Questions: If the real interest rate is 4%, and the inflation rate is 1%, then the nominal interest rate is qquad %.

The answer is the second one: 5%.

To find the nominal interest rate, we use the Fisher equation, which states:

\[ \text{Nominal Interest Rate} = \text{Real Interest Rate} + \text{Inflation Rate} \]

Given:

• Real Interest Rate = 4%
• Inflation Rate = 1%

Plug these values into the equation:

\[ \text{Nominal Interest Rate} = 4\% + 1\% = 5\% \]

Explanation for each option:

• 3%: Incorrect. This would imply a negative inflation rate, which is not given.
• 5%: Correct. This is the sum of the real interest rate and the inflation rate.
• 4%: Incorrect. This would imply no inflation, which contradicts the given inflation rate.
• 3%: Incorrect. This is a repeat of the first option and is incorrect for the same reason.

In summary, the nominal interest rate is 5%.