The Real Rate of Return on Holding Cash Is Equal

question 38

Multiple Choice

The real rate of return on holding cash is equal to:

• A)the nominal interest rate.
• B)the real interest rate.
• C)the expected inflation rate.
• D)zero minus the inflation rate.

---

Definitions:

Nominal Rate

The interest rate unadjusted for inflation, expressing the literal annual cost of credit or return on investment.

Nominal Rate

The reported percentage rate without taking inflation into account, representing the actual yearly cost of funds to the borrower.

Effective Rate

The interest rate on a loan or financial product restated from the nominal rate as an annual rate, which may differ once compounding interest is taken into account.

Compounded Quarterly

Interest calculation method where interest is added to the principal amount at the end of each quarter, leading to interest-on-interest effect.