Question

Which of the following events (everything else constant) would cause a decrease in nominal interest rates?...

Which of the following events (everything else constant) would cause a decrease in nominal interest rates?
a.
There is an increase in expected inflation
b.
Households dramatically increase their savings rate
c.
Corporations see an increase in investment opportunities.
d.
The government runs a larger than expected budget deficit

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Answer #1

Option A is incorrect because increase in inflation increases nominal interest Rate

Option B is incorrect because Households only increase savings rate when the interest rates in market are higher which means nominal rate is higher

Option C is correct because Corporation see an increase in investment opportunities which means they take loan when the interest rates in market is lower which means the nominal rate of return is lower

Option D is incorrect The government runs a larger than expected budget deficit which means the government will borrow money from market which result in decrease in funds available to people which in turn raises nominal rates

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