Higher-Than-Expected Inflation Lowers the Real Interest Rate

Answer the following questions to check your understanding of the story.

What level of the nominal interest rate does the news clip report?

a) Close to 0% or negative

b) 3% to 4%

c) 2%

d) 5% to 3.75%

Why is the real interest rate near zero rather than strongly positive or negative?

Because the _______________.

a) nominal interest rate is much higher than the inflation rate

b) inflation target is just above 2%

c) nominal interest rate is approximately equal to the inflation rate

d) nominal interest rate is much lower than the inflation rate

Why does spending depend on the real interest rate?

Because the real interest rate ____________.

a) measures the true cost of borrowing after inflation

b) is the interest rate banks charge on loans

c) shows the number of dollars a borrower must repay

d) is always lower than the nominal interest rate

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