Assume That Interest Rates Have Been 7% and the Inflation

question 98

Multiple Choice

Assume that interest rates have been 7% and the inflation rate has been 3% for the past three years. Changes in the Federal Reserve's policies are causing the expected inflation rate to increase to 4.5%. If the Fisher effect holds, the nominal rate will _____, and the real interest rate will:

• A) rise to 8.5%; remain 4%.
• B) remain at 7%; drop to 2.5%.
• C) fall to 5.5%; drop to 3%.
• D) rise to 8.5%; remain 3%.

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Definitions:

Financial Stability

The condition of having strong financial health and resilience, often characterized by sufficient liquidity, capital, and risk management capabilities.

Developing Close Relationships

The process of building strong, beneficial partnerships based on trust, commitment, and communication, often in a professional or business context.

Communicating Effectively

The ability to convey information and ideas in a clear, concise, and meaningful way to ensure mutual understanding.

Business Reviews

Formal evaluations of a company's performance, typically involving analysis of financial statements, operational effectiveness, and market positioning.