If Expected Inflation Is Constant and the Nominal Interest Rate

question 92

Multiple Choice

If expected inflation is constant and the nominal interest rate increased 3 percentage points,what would happen to the real interest rate?

• A) It would increase 3 percentage points.
• B) It would increase,but by fewer than 3 percentage points.
• C) It would decrease,but by fewer than 3 percentage points.
• D) It would decrease by 3 percentage points.

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Definitions:

Common Stock Optionwarrants

Equity derivatives that give the holder the right to purchase common stock at a specified price within a certain time period.

Unrealized Increase

The potential gain in the value of an investment that has not yet been sold and thus not yet converted into actual profit.

Donated Capital

Assets and resources given to a company without the expectation of return or compensation, often used to fund operations or expand business activities.

Contra Account

An account used in a general ledger to reduce the value of a related account when the two are netted together.