Asked by Ellen Likens on Jun 09, 2024
Verified
Refer to Table 24-4. If the nominal interest rate was 12 percent in Year 2, then
A) the real interest rate in Year 2 was 6 percent.
B) the real interest rate in Year 2 was 18 percent.
C) Lee's Year 1 food expenditures in Year 2 dollars amount to $5,800.
D) Lee's Year 1 food expenditures in Year 3 dollars amount to $6,200.
Nominal Interest Rate
The interest rate before adjustments for inflation, representing the face value of financial products.
Real Interest Rate
The interest rate that has been adjusted for inflation, showing the real cost of borrowing or the real yield on an investment.
Year 2 Dollars
Year 2 dollars refer to the value of currency adjusted for inflation to a base year's purchasing power, here implicitly indicated as "Year 2."
- Identify the impact of inflation on nominal and real interest rates.
Verified Answer
JB
Jason BrownJun 09, 2024
Final Answer :
A
Explanation :
The real interest rate can be calculated using the formula: real interest rate = nominal interest rate - inflation rate. Without the table, we can't calculate specific values for Lee's expenditures, but if the nominal rate was 12% and the real interest rate was 6%, it implies an inflation rate of 6% (12% - 6% = 6%). This choice does not require specific table data to validate the calculation method.
Learning Objectives
- Identify the impact of inflation on nominal and real interest rates.