If the inflation rate is 2 percent and the real interest rate is 7 percent, then
ID: 1200606 • Letter: I
Question
If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is
Options:
3.5 percent.
5 percent.
9 percent
7 percent.
Long-term bonds are
Options:
riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
3.5 percent.
5 percent.
9 percent
7 percent.
Long-term bonds are
Options:
riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
Explanation / Answer
1. CPI of current year = Current price of the item / Price of the base year X CPI of the base year
= 5750/5000 X 160 = 184
So, answer is (A) 184.0
2. Real interest rate = Nominal interest rate - Inflation
7 = Nominal interest rate - 2
Nominal interest rate = 7 + 2 = 9 percent.
Answer is (C) 9 percent.
3. (C) less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.