Effect on nominal interest rate on changing the inflation rate.
Explanation of Solution
The nominal interest rate is the alternative of the actual interest rate and the powerful interest rate. Real interest prices are typically essential to buyers and lenders, at the same time as powerful hobby prices are essential to each debtor and buyers and lenders.
The nominal interest rate is the agreed-upon interest rate associated with the loan, but not the interest rate that consumers typically pay. Rather, clients pay a powerful fee that varies primarily based totally on charges and compounding effects. The Annual
The CPI is used to calculate the real interest rate, which is calculated as the nominal interest rate less the inflation rate (
As a result, the nominal interest rate rose less than the rate of inflation did. Hence, the correct option is C.
Introduction:
How do banks determine the interest rate they charge? There are two important points to consider:
How much interest is enough for a bank to be worth lending money (the real interest rate they get)? How much of the
Suppose the bank wants him to earn 10% interest but assumes that there is 3% inflation. If you don't include this inflation in the interest rate change, then effectively he earns only 7% (because he loses his 3% of the purchasing power of the 10% interest rate). Instead, banks factor inflation into interest rates. Taking inflation into account, this bank charges 13% interest.
Chapter 29 Solutions
Krugman's Economics For The Ap® Course
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