To calculate the nominal interest rate, we can use the Fisher equation:

$(1 + r_{nominal}) = (1 + r_{real}) \times (1 + r_{inflation})$

Where:

• $r_{nominal}$ is the nominal interest rate.
• $r_{real}$ is the real interest rate.
• $r_{inflation}$ is the inflation rate.

Given:

• Real interest rate ($r_{real}$) = 3.0% or 0.03
• Inflation rate ($r_{inflation}$) = 5.0% or 0.05

Step 1: Substitute the values into the Fisher equation:

$(1 + r_{nominal}) = (1 + 0.03) \times (1 + 0.05)$

Step 2: Calculate the right-hand side:

$(1 + r_{nominal}) = 1.03 \times 1.05 = 1.0815$

Step 3: Solve for the nominal interest rate:

$r_{nominal} = 1.0815 - 1 = 0.0815 \text{ or } 8.15\%$

The correct nominal interest rate is 8.15%.

Would you like to explore this further or have any more questions?

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1. What is the significance of the Fisher equation in finance?
2. How does the nominal interest rate affect loan repayments?
3. What are the practical applications of knowing the nominal interest rate?
4. How do central banks use nominal and real interest rates in policy-making?
5. What happens when the inflation rate is higher than the nominal interest rate?

Tip: Always ensure to convert percentages to their decimal form before performing calculations.