Question

If the real interest rate is 7 percent and the expected inflation rate is 2 percent, what would a person expect to have after a year?

Select one:

a. 2 percent less dollars, which will purchase 7 percent more goods

b. 10 percent more dollars, which will purchase 6 percent more goods.

c. 9 percent more dollars, which will purchase 7 percent more goods.

d. 7 percent more dollars, which will purchase 9 percent more goods.

e. 5 percent more dollars, which will purchase 9 percent more goods.

f. 5 percent more dollars, which will purchase 9 percent less goods

g. 9 percent more dollars, which will purchase 5 percent more goods.

Answer 1

The correct option is C.

Reason - Real Interest rate = Nominal Interest rate - Rate of Inflation

In this case; Real Interest rate = 7% , Inflation = 2%

So, Nominal Interest Rate = (7 + 2)% = 9%

Nominal Interest rate shows the increase in amount the person possess.

Therefore,the person will have 9% more dollar.

Real Interest Rate shows the increase in purchasing power of the consumer.

Therefore, the person will be able to purchase 7% more goods.