ECONOMICS (CBSE/UGC NET)

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ECONOMICS

MONEY

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
In an attempt to collect a real return of 10% on loans, Montwood bank will charge ____ % interest because they expect inflation to increase by 15% over the next 30 years.
A
15
B
10
C
20
D
25
E
30
Explanation: 

Detailed explanation-1: -The real rate is equal to the nominal rate minus the rate of inflation so the real rate = 4%-6% =-2%. This is how inflation harms savers.

Detailed explanation-2: -The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.

Detailed explanation-3: -For example, if the rate of return for bonds you hold is 6% and the inflation rate is 3%, then the real rate of return will be 3%, not 6%.

Detailed explanation-4: -A periodic interest rate is a rate that can be charged on a loan, or realized on an investment over a specific period of time. Lenders typically quote interest rates on an annual basis, but the interest compounds more frequently than annually in most cases.

There is 1 question to complete.
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