Given a Nominal Interest Rate of 3% and an Inflation

question 74

Multiple Choice

Given a nominal interest rate of 3% and an inflation rate of 4.5%,what is the real interest rate?

• A)3%
• B)0%
• C)-1.4%
• D)1.5%
• E)7.5%

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Definitions:

Substitution Effect

Alterations in spending behaviors triggered by variations in the prices of goods relative to each other, prompting individuals to replace one item with an alternative.

Output Effect

The change in total output resulting from adjusting production levels, typically in response to changes in market demand or cost of production.

Fixed Proportions

A production process where inputs must be used in specific proportions, and the ratio of inputs cannot be easily changed.