Asked by Aashma Bista on May 16, 2024
Verified
The nominal interest rate:
A) varies directly with the rate of expected inflation in an economy.
B) is the interest rate expressed in dollars of constant purchasing power.
C) equals the difference between the real interest rate and the inflation rate.
D) is the basis for decisions taken by the lenders and the borrowers in an economy.
E) is the percentage increase in the average price level from one year to the next.
Expected Inflation
The rate at which the general level of prices for goods and services is rising, as anticipated by consumers and businesses.
Nominal Interest Rate
The interest rate expressed in dollars of current value (that is, not adjusted for inflation) as a percentage of the amount loaned; the interest rate specified on the loan agreement.
Real Interest Rate
The interest rate adjusted for inflation, reflecting the true cost of borrowing and the real yield to investors.
- Fathom the impact and modification in the value of currency over time, resulting from inflation.
- Examine the distinct repercussions of inflation on a range of economic agents, such as borrowers, lenders, and workers.
Verified Answer
MH
Maisyarah HawafiMay 17, 2024
Final Answer :
A
Explanation :
The nominal interest rate varies directly with the rate of expected inflation in an economy. This means that as inflation expectations increase, nominal interest rates also increase to compensate for the erosion of purchasing power caused by inflation.
Learning Objectives
- Fathom the impact and modification in the value of currency over time, resulting from inflation.
- Examine the distinct repercussions of inflation on a range of economic agents, such as borrowers, lenders, and workers.