Question

Question Completion Status: QUESTION 22 Which among the following statements is correct about the relationship between inflation and interest rates? There is no relationship between inflation and interest rates The interest rate is determined by the rate of inflation In order to fully understand inflation, we need to know how to correct for the effects of interest rates In order to fully understand interest rates, we need to know how to correct for the effects of inflation QUESTION 23 Which of the following is the most accurate statement about real and nominal interest rates? Real interest rates can be either positive or negative, but nominal interest rates must be positive Real interest rates and nominal interest rates must be positive Real interest rates must be positive, but nominal interest rates can be either positive or negative Real interest rates and nominal interest rates can be either positive or negative

Answer 1

Q22) Answer : c) In order to fully understand inflation, we need to know how to correct for the effects of interest rates.

Explanation : This is because interest rates and inflation are inversely correlated. That is, if interest rate falls, people will take out money to buy goods and services, purchasing power rises causing the economy to grow and inflation to rise. The opposite holds true for rising interest rate.

Q23) Answer : a) Real interest rate can be either negative or positive, but nominal interest rate must be positive

Explanation : Real interest rates are negative when the rate of inflation is higher than the nominal interest rate (following the equation in Fisher effect where real interest rate = nominal interest rate - inflation). SImilarly real interest rates are positive when the rate of inflation is lower than the nominal interest rate. But the nominal interest rate cannot be negative because nominal interest rate is the rate you pay the lender for the money you borrow. So if nominal interest rate is negative, it means the lender is paying you to borrow money.

Q24) Answer : a) When the nominal interest rate is rising, the real interest rate is necessarily rising; when the nominal interest rate is falling, the real interest rate is necessarily falling.

Explanation : According to the Fisher's equation, real interest rate is the nominal interest rate adjusted in the rate of inflation. Hence if the nominal rate rises, the real rate will necessarily rise and vice versa.

Q25) Answer : b) 92.3

Explanation :
Base year 1987 CPI1996"> cost of goods 1990 X 100 Cost of goods 1987 120. > C1990x100 – 0 (1987 Similarly, сан ? CPI1992 C1992 y low C1987 130 - C1992 X100. - ☺ 9987 3) C1987>(1992/100 130 61987 > 0.77 (1992 - Substituting ② in .. uno 120 2 61990 X 100 0.77€1992 =120X0.77 C1910 x 100 . (1992^ = 92.3 b). This signifies CPI for 1990 with base year

Q26) Answer : b) between 120 and 125.

Explanation : CPI of a year is the cost of market basket of that year divided by the cost of market basket of the base year multiplied by 100. This way we get the Cost of market basket of the base year and can hence calculate the CPI for another year.

Q27) Answer : c) more of relatively cheaper things and less of relatively more expensive things