When Nominal Interest Rates Are Above Zero, the AD Curve

question 78

Multiple Choice

When nominal interest rates are above zero, the AD curve has a ________ slope because when the inflation rate increases the monetary authorities will ________ the real interest rate as inflation rises which will ________ investment and aggregate output.

• A) negative; raise; decrease
• B) negative; lower; increase
• C) positive; raise; increase
• D) positive; lower; increase

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Definitions:

Quoted Rates

The publicly listed interest rates or prices for financial instruments or bank deposits.

Effective Annual Rate

The interest rate on an investment or loan, annualized for compounding over a given period more than once a year.

APR

Annual Percentage Rate; a measure of the cost of credit, expressed as a yearly interest rate.

Rate of Compounding

The rate at which an investment grows due to compounding, where interest earns interest over periods.