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

question 36

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 U.S. would be greater than the nominal interest rate in the U.K.
• 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:

Preferred Stock

A class of ownership in a corporation with a higher claim on assets and earnings than common stock, often receiving dividends before common shareholders.

Annual Dividend

The total sum of the dividends paid to shareholders over a year, often cited per share.

Rates of Return

Financial results such as gains or losses on an investment over a predetermined time frame, expressed as a percentage of the original investment fee.

Net Cash Flows

The amount of cash that is generated or lost by a business in a given time period, calculated as cash inflows minus cash outflows.