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.
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.
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