If Inflation Is Anticipated to Be 5 Percent During the Next

question 43

Multiple Choice

If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?

• A) 5 percent.
• B) 10 percent.
• C) 25 percent.
• D) None of the above.

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Definitions:

Prototype

An especially representative example of a concept.

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Fundamental ideas or principles that serve as the foundation for a subject or theory.

Mental Set

A psychological tendency to approach situations in a certain way due to past experiences and perceptions, which can sometimes hinder problem-solving.

Mental Image

A mental representation that mirrors or resembles the thing it represents; mental images occur in many and perhaps all sensory modalities.