Given That the Inflation Rate in 2006 Was About 3

question 94

Multiple Choice

Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?

• A) The purchasing power of investors in these bonds grew over the course of the year.
• B) The real interest rate for investors in these bonds was greater than the rate of inflation.
• C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
• D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.

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Definitions:

Compensating Balances

A minimum bank account balance a borrower is required to maintain as part of a loan agreement, offering the bank some security.

Transactional Motive

The transactional motive is the need to hold cash for the purpose of conducting day-to-day business operations, such as paying wages and suppliers.

Zero Balance Account

A zero balance account is a type of bank account that maintains a balance of zero dollars by automatically transferring funds from a master account in the exact amount of transactions clearing the account.