Asked by Rachel Hwang on May 22, 2024
Verified
Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?
A) the nominal exchange rate
B) the nominal interest rate
C) the real exchange rate
D) the real interest rate
Real Interest Rate
The interest rate adjusted for inflation, reflecting the true cost of borrowing and the true yield to the lender or investor, compared to the nominal interest rate.
Purchasing Power
The purchasing power of a currency, indicating the quantity of goods or services obtainable with one money unit.
- Gain insight into the interplay between interest rates, consumer outlays, and business capital allocation.
Verified Answer
NI
Nawshaba IslamMay 28, 2024
Final Answer :
D
Explanation :
The real interest rate is the rate at which your ability to purchase grows while accounting for inflation. It represents the actual increase in purchasing power you will experience from holding an interest-earning investment. The nominal interest rate, on the other hand, only indicates the stated rate of return before factoring in inflation. Therefore, the real interest rate is the best choice for describing the growth in purchasing power from an interest-earning investment.
Learning Objectives
- Gain insight into the interplay between interest rates, consumer outlays, and business capital allocation.
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