If the Nominal Interest Rate Is 8 Percent and the Inflation

question 211

Multiple Choice

If the nominal interest rate is 8 percent and the inflation rate is 4 percent, what is the real interest rate?

• A) 0.44 percent
• B) 4 percent
• C) 6 percent
• D) 12 percent

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Definitions:

Present Value

The calculated present value of future monetary sums or cash flow series, with a defined rate of return.

Invest

The process of investing funds or assets in a project with the aim of earning extra income or gains.

Simple Interest

Interest calculated only on the principal amount, or initial investment, not on the accumulated interest of previous periods.

Compounded Annually

A method of calculating interest where the interest earned each year is added to the principal, so that the balance doesn't merely grow, it grows at an increasing rate.