Suppose That a Bank Wishes to Make a 5% Rate

question 140

Multiple Choice

Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects inflation over the course of the loan to be roughly 3%. Which statement is TRUE?

• A) As long as the bank charges a nominal interest rate of at least 5%, it will earn its expected return.
• B) If the bank charges an interest rate of 8% or higher, it will earn the expected return.
• C) If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected.
• D) If the bank charges 8% and the inflation rate is more than 3%, then the bank will have earned a higher rate of return than expected.

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Definitions:

Total Utility

The total satisfaction or benefit obtained from consuming a given quantity of goods or services.

Marginal Utility

The added satisfaction or utility that a consumer derives from consuming an additional unit of a good or service.

Total Utility

This term refers to the total satisfaction received by consuming a certain amount of goods or services.

Milk Shakes

Although commonly a beverage, if not directly relevant to economics or provided as a specific economic term, the answer is NO.