In the context of economics, which rate is calculated by adding the inflation premium to the real risk-free rate (r*)?

• A. Gross domestic product growth rate
• B. Nominal interest rate
• C. Exchange rate
• D. Unemployment rate

Answer: (B)

Verified step by step guidance

1. Understand the concept of the real risk-free rate (r*), which represents the return on an investment with zero risk and no inflation.
2. Recognize that the inflation premium is the additional return investors require to compensate for expected inflation over the investment period.
3. Know that the nominal interest rate is the rate observed in the market, which includes compensation for both the real risk-free rate and expected inflation.
4. Express the relationship mathematically as: \(\text{Nominal Interest Rate} = r^* + \text{Inflation Premium}\).
5. Identify that this formula distinguishes the nominal interest rate from other economic rates such as GDP growth, exchange rate, or unemployment rate.