Suppose You Have $400 and the Inflation Rate Is 4

question 89

Multiple Choice

Suppose you have $400 and the inflation rate is 4 percent. In order to earn a real return of $20 on your investment, the nominal interest rate must be

• A) 1 percent.
• B) 5 percent.
• C) 9 percent.
• D) 12 percent.

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Definitions:

Giffen Good

The hypothetical inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward.

Income Effect

The dynamics of income change in a person or an economy, and its role in altering the demand pattern for goods and services.

Substitution Effect

The change in consumption patterns due to a change in relative prices, prompting consumers to substitute a product that has become relatively cheaper for one that has become relatively more expensive.

Marginal Rate

A rate that indicates the change in a variable (such as cost, revenue, or tax) as its underlying factor changes incrementally.