If the Real Rate of Return Is 0 Percent, and the Inflation

question 92

Multiple Choice

If the real rate of return is 0 percent, and the inflation rate is 3 percent, then the nominal interest rate must be:

• A) 0 percent.
• B) 3 percent.
• C) −3 percent.
• D) 6 percent.

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Definitions:

Substitution Effect

A change in consumption patterns due to a change in the relative prices of goods, leading consumers to replace more expensive items with less expensive ones.

Price of Labor

The wage rate or compensation given to workers for their labor services, typically influenced by the supply and demand for labor in the market.

Output Effect

The output effect describes how changes in price can affect the quantity of goods or services produced by firms, often related to the concepts of supply and demand.

Technological Improvement

Enhancements or advancements in technology that increase productivity, efficiency, or quality in the production of goods and services.