Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
savings account
B
fixed investments
C
purchasing power
D
consumer debt
Understanding the Answer
Let's break down why this is correct
Answer
Real interest rates and inflation are related because real interest rates show how much purchasing power you gain from your investment after considering inflation. Similarly, nominal interest rates are the stated rates that do not account for inflation. Therefore, just as real interest rates are derived by subtracting inflation from nominal interest rates, we can think of nominal interest rates in relation to the inflation rate as the total return you receive. For example, if a bank offers a nominal interest rate of 5% and the inflation rate is 2%, the real interest rate would be 3%. This means the nominal interest rates relate to the inflation rate because they represent the actual earnings before adjusting for the decrease in purchasing power due to inflation.
Detailed Explanation
Nominal interest rates are the rates you see, but they don't show how much your money can actually buy. Other options are incorrect because Some might think savings accounts are the answer, but they don't directly relate to how interest affects buying things; Fixed investments might seem related, but they don't show how interest rates affect your money's value.
Key Concepts
Real Interest Rates
Inflation
Nominal Interest Rates
Topic
Real Interest Rates and Inflation
Difficulty
easy level question
Cognitive Level
understand
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