If Expected Inflation Is Constant and the Nominal Interest Rate

question 48

Multiple Choice

If expected inflation is constant and the nominal interest rate increased 2 percentage points, what would happen to the real interest rate?

• A) It would increase 2 percentage points.
• B) It would increase, but by fewer than 2 percentage points.
• C) It would decrease, but by fewer than 2 percentage points.
• D) It would decrease by 2 percentage points.

---

Definitions:

Financing Activities

Transactions and events that affect long-term liabilities and equity of a company, including issuing debt, obtaining loans, or issuing and selling equity securities.

Interest Expense

The financial charge an organization incurs over time for borrowing funds.

Note Payable

A written promissory note wherein the borrower agrees to pay back the lender on demand or at a predetermined future date, along with interest.

Statement Of Cash Flows

A financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations, investment activities, and financing, as well as all cash outflows that pay for business activities and investments during a given period.