Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Real interest rates increase when inflation increases.
B
Real interest rates decrease when inflation increases.
C
Real interest rates remain constant regardless of inflation.
D
Real interest rates are not affected by inflation.
Understanding the Answer
Let's break down why this is correct
Answer
Real interest rates and inflation are closely related because real interest rates take inflation into account. When inflation rises, the purchasing power of money decreases, meaning that the money you have today will buy less in the future. Real interest rates are calculated by subtracting the inflation rate from the nominal interest rate, which is the stated rate before inflation. For example, if a bank offers a nominal interest rate of 5% and inflation is 3%, the real interest rate is only 2%. This shows that even if you earn interest, if inflation is high, the actual value of your money grows much slower than it appears.
Detailed Explanation
When inflation goes up, the real interest rate goes down. Other options are incorrect because Some might think that higher inflation means higher interest rates; It's a common mistake to think interest rates stay the same no matter what.
Key Concepts
Real interest rate
Topic
Real Interest Rates and Inflation
Difficulty
easy level question
Cognitive Level
understand
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