Question

151) If the nominal interest rate in an economy is 6% and the inflation rate in the economy is 10%, then the real interest rate is:

151) A) 10%. B) -6%. C) -4%. D) 6%.

152) The federal funds rate is a:

152) A) short-term real interest rate. B) short-term nominal interest rate. C) long-term nominal interest rate. D) long-term real interest rate.

153) Which of the following equations is correct?

153) A) Realized real interest rate = nominal interest rate + realized inflation rate

B) Realized real interest rate = nominal interest rate - realized nominal interest rate

C) Realized real interest rate = nominal interest rate - realized inflation rate

D) Realized real interest rate = realized inflation rate

154) If the realized real interest rate in an economy is 6%, the nominal interest rate is 8%, and the expected inflation rate is 8%, then the realized inflation rate in the economy is:

154) A) 6%. B) 8%. C) 4%. D) 2%.

155) If the realized real interest rate in an economy is 6%, the realized inflation rate is 8%, and the expected inflation rate is 8%, then the nominal interest rate in the economy is:

155) A) 8%. B) 2%. C) 14%. D) 20%.

Answer 1

151. Real Interest Rate = Nominal interest rate - inflation rate = 6% - 10% = -4%

The correct answer is C.

152. B. Short term nominal interest rate

Reserve Requirement is the non interest bearing reserve requirement which the banks must mandatorily keep with the Fed as a certain percentage of their deposits. Federal Fund rate is the interest rate that the banks charge from the other banks for lending them excess reserves left after reserve requirement on an overnight basis. The banks can utilise these excess reserves by lending it to other banks which are facing shortfall of funds and charge them interest on the basis of it.

153. C. Realised real interest rate = nominal interest rate - realized inflation rate

The real interest rate is the interest rates after adjusting inflation in the economy. it represents the cost of borrowing for the borrower and the amount of returns that the lenders will be receiving. It is essential to compute real interest rates because the lending rates essentially includes the nominal interest rates and may not correctly compute the amount of returns the lenders will be getting. This is because the inflation in the economy reduces the purchasing power of the returns that the lenders will be getting and hence real interest ensure the actual returns to the lenders after adjusting inflation.

154. Real Interest rate = Nominal interest rate - actual inflation

Real interest rate = 6%, Nominal rate of interest = 8%, Realised inflation = Nominal rate - real rate = 8%-6% = 2%

The correct answer is D.

155. Real interest rate = 6%, inflation rate = 8%, Nominal Interest rate = Real interest rate + Inflation = 6% + 8% = 14%

The correct answer is C.