Question

1. Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

   	a.	real; real
   	b.	nominal; nominal
   	c.	real; nominal
   	d.	nominal; real

Answer 1

Option C.

• Investment depends on the real interest rate and the money demand depends on the nominal interest rate.
• The real interest rate is usually the rate of interest an investor incurs after investment. This interest rate is usually used for investments as it takes into account the affects of inflation.
• Money demand inversely depends on the nominal interest rates because when the nominal interest rates rise, the money demand decreases and when the nominal interest rates fall, the money demand Increases.