Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher real interest rates encourage more savings.
B
Lower real interest rates discourage savings.
C
Inflation has no effect on savings behavior.
D
Both A and B are correct.
Understanding the Answer
Let's break down why this is correct
Answer
Real interest rates are the rates you actually earn on your savings after taking inflation into account. When inflation is high, it erodes the purchasing power of your money, meaning that even if you earn interest, it might not be enough to keep up with rising prices. For example, if you have a savings account that offers a 2% interest rate but inflation is 3%, your real interest rate is actually -1%. This situation can discourage people from saving because they feel their money is losing value over time, leading them to spend rather than save. In an inflationary environment, lower real interest rates can prompt people to look for other ways to invest their money, as they seek to protect their savings from losing value.
Detailed Explanation
Both higher and lower real interest rates can change how people save. Other options are incorrect because Some might think that higher real interest rates always lead to more savings; It's a common belief that lower real interest rates always mean less saving.
Key Concepts
Savings behavior
Topic
Real Interest Rates and Inflation
Difficulty
easy level question
Cognitive Level
understand
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