If the Real Interest Rate Is 5%, the Rate of Inflation

question 48

Multiple Choice

If the real interest rate is 5%, the rate of inflation in the United States is 6%, and the rate of inflation in the United Kingdom is 3%, which of the following statements would NOT be true?

• A)The nominal rate of interest in the United States would be greater than the nominal interest rate in the United Kingdom.
• B)The difference between the U.K. and U.S. interest rates is a function of the difference between their inflation rates.
• C)The nominal rate of interest in the United States and the United Kingdom would be the same because of purchasing power parity.
• D)Investors would get a higher return on their money in the United States.

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Definitions:

Reduced Wage

A wage that is decreased from a previous level, often due to economic pressures or changes in job responsibilities.

Income Effect

The alteration in a person's or economic system's earnings and the effect of this alteration on the demand for a particular product or service.

Wage Decrease

A reduction in the hourly or salaried compensation paid to workers.

Utility Maximizing

The economic principle that individuals and firms strive to achieve the highest satisfaction or benefit from their resources and choices.