Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Real interest rates decrease, leading to higher borrowing costs
B
Real interest rates increase, encouraging more savings
C
Real interest rates remain unchanged, affecting investment decisions
D
Real interest rates decrease, potentially stimulating economic growth
Understanding the Answer
Let's break down why this is correct
Answer
Inflation refers to the general increase in prices, which means that the purchasing power of money decreases over time. Real interest rates are the interest rates that take inflation into account, showing how much more valuable money becomes after adjusting for rising prices. If nominal interest rates, which are the stated rates without inflation adjustment, stay the same while inflation increases, the real interest rate effectively falls. For example, if the nominal interest rate is 5% and inflation rises from 2% to 4%, the real interest rate drops from 3% to 1%. This means that even though you earn the same amount of interest, the actual value of that interest is less because prices are rising faster.
Detailed Explanation
When inflation goes up, the money you earn loses value faster. Other options are incorrect because Some might think higher real interest rates mean more savings; It's a common mistake to think real interest rates stay the same.
Key Concepts
Real Interest Rates
Inflation
Consumer Behavior
Topic
Real Interest Rates and Inflation
Difficulty
hard level question
Cognitive Level
understand
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