ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If real interest rates are rising at 5% and the nominal interest rate is rising at 9%, what was the inflation rate?
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4%
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-4%
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-14%
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14%
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Explanation:
Detailed explanation-1: -If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent.
Detailed explanation-2: -According to the Fisher effect, if inflation rises then the nominal interest rate rises. If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%. Inflation induces people to spend more resources maintaining lower money holdings.
Detailed explanation-3: -If the nominal interest rate is 5% and the inflation rate is 4%, this means the real interest rate is 9%.
Detailed explanation-4: -Answer and Explanation: The exact real interest rate must be 2.91% .
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