An Investor Wants to Be Able to Buy 4 Percent

question 15

Multiple Choice

An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2 percent. Which statement(s) below is/are true?
I. 4 percent is the desired real risk-free interest rate.
II. 6 percent is the approximate nominal rate of interest required.
III. 2 percent is the expected inflation rate over the period.

• A)I only
• B)II only
• C)III only
• D)I and II only
• E)I,II,and III are true.

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Definitions:

Cognitive Dissonance

The mental discomfort experienced by a person holding two or more contradictory beliefs, values, or ideas.

Dissonance

A psychological or emotional state of tension resulting from conflicting attitudes, beliefs, or behaviors.

Festinger

Leon Festinger, an American social psychologist known for his theory of cognitive dissonance, which describes the discomfort experienced when holding two or more conflicting cognitions.

Sherif's Robbers Cave

An experiment on conflict and cooperation by Muzafer Sherif, demonstrating how group identity can be used to foster unity or create conflict.