Question

Nominal interest rates are higher than real interest rates as long as A.expected inflation is positive....

Nominal interest rates are higher than real interest rates as long as

A.expected inflation is positive.

B.the government taxes interest income.

C.inflation is expected to decline in the future.

D.long-term interest rates are higher than short-term interest rates.

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Answer #1

ANSWER

Nominal Interest Rates are the rates that are Quoted by Banks. Such Rates are Infusion of Real Interest Rates and the Expected Inflation. In other words, Nominal Interest Rates Includes Real Interest Rate and Expected Inflation since any Investor would wnat his Return over and above Inflation Rate. So when Inflation Rate will be Positive, Nominal Rate will always Exceed Real Interest Rate because if Nominal Rate is Less than or Equal to the Real Rate than nobody will prefer to Invest in Banks as they are not able to coverup the Inflation Rate.

CORRECT ANSWER - Option (A)

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