Suppose That the Nominal Interest Rate and Expected Inflation Rate

question 31

Multiple Choice

Suppose that the nominal interest rate and expected inflation rate both increase by 3%. These equal increases in the nominal interest rate and expected inflation rate will cause:

• A) an increase in the real interest rate.
• B) a decrease in government spending.
• C) a decrease in money demand.
• D) a decrease in investment.
• E) a decrease in the real interest rate.

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Definitions:

Interest Tax Shield

The tax savings achieved by deducting payable interest on debt from taxable income, thereby reducing the overall tax expense.

Deductibility

Deductibility refers to the eligibility of an expense to be subtracted from gross income to reduce taxable income, under tax regulations.