If People Expect an Inflation Rate of 3

question 2

Multiple Choice

If people expect an inflation rate of 3.3 per cent, and the real interest rate is 3 per cent, the nominal interest rate equals (approximately)

• A)9.9 per cent.
• B)6.3 per cent.
• C)8.6 per cent.
• D)0.3 per cent.

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Definitions:

Market Timing

An investment strategy where the investor tries to predict future market movements to buy low and sell high.

Asset Allocation Fund

A mutual fund that spreads its investments across various asset classes, aiming to reduce risk through diversification.

Sector Fund

A mutual fund that invests exclusively in a particular sector of the economy, such as technology, health care, or finance.

Money Market Funds

Mutual funds that invest in short-term debt securities such as government bonds, treasury bills, and commercial paper, offering investors liquidity and safety.