If the Rate of Inflation Is 6 Percent and the Real

question 98

Multiple Choice

If the rate of inflation is 6 percent and the real interest rate is 2 percent, the nominal interest rate should be

• A) 2 percent.
• B) 4 percent.
• C) 8 percent.
• D) -2 percent.

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Definitions:

Expiration Date

The date on which an option, futures contract, or insurance policy loses its validity or effect.

Exchange Rate

A financial metric used to determine how much one currency is worth in terms of another for trade and financial transactions.

Unbiased Forward Rates

Future rates of interest inferred from current bond prices, assuming no arbitrage opportunities.

Forward Rate

An agreed-upon price for a financial transaction that will occur at a future date, used in derivatives markets.