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31 August, 05:19

If the nominal interest rate equals 5 percent and expected inflation is 3 percent, then the new nominal and real interest rates are respectively:

a) 3% and 5%.

b) 8% and 5%.

c) 5% and 2%.

d) 5% and 7%.

e) 7% and 5%

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Answers (1)
  1. 31 August, 07:13
    0
    c) 5% and 2%.

    Explanation:

    Given that

    Nominal interest rate = 5%

    Expected inflation = 3%

    We know that

    Real interest rate = Nominal interest rate - inflation rate

    = 5% - 3%

    = 2%

    And the new nominal rate is equal to given nominal interest rate i. e 5%

    Therefore, we consider all information which is mentioned in the question.
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