Asked by Thompson Stockmann on May 01, 2024
Verified
If the real interest rate is 11 percent and the price level is falling at a rate of 5 percent, what is the nominal interest rate?
A) 6 percent
B) -5 percent
C) 0.6 percent
Real Interest Rate
The rate of interest an investor expects to receive after allowing for inflation, reflecting the true cost of borrowing.
Nominal Interest Rate
The interest rate before adjusting for inflation; the stated interest rate of a given bond or loan.
Price Level
A measure of the average prices of goods and services in an economy, which can affect purchasing power and inflation.
- Comprehend the principle of inflation and its impacts on economic conditions.
- Elucidate the impact of inflation on interest rates by examining the Fisher effect.
Verified Answer
RM
Raquel MartinezMay 03, 2024
Final Answer :
A
Explanation :
The nominal interest rate can be calculated by adding the real interest rate to the inflation rate. In this case, since the price level is falling (deflation) at a rate of 5 percent, the inflation rate is -5 percent. Therefore, the nominal interest rate is 11 percent (real interest rate) - 5 percent (inflation rate) = 6 percent.
Learning Objectives
- Comprehend the principle of inflation and its impacts on economic conditions.
- Elucidate the impact of inflation on interest rates by examining the Fisher effect.