Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher inflation decreases the real interest rate if nominal rates remain unchanged.
B
Real interest rates are unaffected by changes in inflation if the money supply is fixed.
C
An increase in real interest rates typically encourages more borrowing and spending.
D
When inflation rises significantly, it can lead to a decrease in consumer purchasing power.
E
Real interest rates can be negative if inflation exceeds nominal interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
Real interest rates and inflation are closely related concepts in economics. Real interest rates are the rates you actually earn on your savings or pay on your loans after accounting for inflation. When inflation goes up, it means that the prices of goods and services increase, which can erode the purchasing power of money. For example, if you have a savings account with a nominal interest rate of 3% but inflation is at 2%, your real interest rate is only 1%, meaning your money is growing, but not as much as it seems. Therefore, higher inflation can lead to lower real interest rates, and understanding this relationship helps people make better financial decisions.
Detailed Explanation
Other options are incorrect because Some might think that higher inflation always lowers real interest rates; It's a common belief that real interest rates don't change with inflation if the money supply is fixed.
Key Concepts
Real Interest Rates
Inflation
Consumer Behavior
Topic
Real Interest Rates and Inflation
Difficulty
medium level question
Cognitive Level
understand
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