Suppose That the Nominal Interest Rate Is 7 Percent and the Expected

question 41

Multiple Choice

Suppose that the nominal interest rate is 7 percent and the expected inflation rate is 3 percent. What happens with the value of savings?

• A) The dollar value of savings increases by 11 percent, and the value of savings measured in goods is expected to increase by 3 percent.
• B) The dollar value of savings increases by 11 percent, and the value of savings measured in goods is expected to increase by 4 percent.
• C) The dollar value of savings increases by 7 percent, and the value of savings measured in goods is expected to increase by 4 percent.
• D) The dollar value of savings increases by 7 percent, and the value of savings measured in goods is expected to increase by 3 percent.

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Definitions:

Discount Rate

The interest rate set by central banks that they charge commercial banks for loans and advances, influencing monetary conditions and economic indicators like inflation and investment.

Government Securities

Financial instruments issued by a government to borrow money from investors, often with a promise to pay periodic interest and repay the principal at maturity.

Fed Regulations

Fed regulations are rules set by the Federal Reserve, the central bank of the United States, to govern the practices of financial institutions, aiming at ensuring stability and transparency in the financial system.

Cash Shortages

A situation where there is not enough cash available to meet demands.