Suppose the Interest Rate Is Zero and the Public Expects

question 88

Multiple Choice

Suppose the interest rate is zero and the public expects the price level to fall by 2%. Which of the following statement is true?

• A) The value of money falls by 2%.
• B) Money becomes an interest earning asset; it earns a nominal interest rate of 2%.
• C) Money becomes an interest earning asset; it earns a real interest rate of 2%.
• D) Bonds and money will become perfect substitutes since both are non-interest earning assets.

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Definitions:

Industrially Advanced Countries

Nations with highly developed economies characterized by significant industrial growth, technological advancement, and high standard of living.

Progressive Tax

A tax system where the tax rate increases as the taxable amount or income grows, aiming at a fairer distribution of wealth.

Tax Rates

The percentage at which an individual or corporation is taxed by the government.

Entrepreneurial Income

Income generated from running a business, taking into account the risks and rewards of entrepreneurship.