Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
The nominal rate equals the real rate plus the inflation rate.
True or False?
![### Understanding Interest Rates: Nominal and Real
**Question:**
The nominal rate equals the real rate plus the inflation rate.
- ⭕ True
- ⭕ False
**Explanation:**
To better understand this, let's break down the concepts:
- **Nominal Rate:** This is the interest rate before adjusting for inflation. It's the rate that's typically advertised or quoted by banks and financial institutions.
- **Real Rate:** This is the interest rate that has been adjusted to remove the effects of inflation. It reflects the true cost of borrowing and the real yield to lenders.
- **Inflation Rate:** This is the rate at which prices for goods and services increase over time. It reduces the purchasing power of money.
The relationship between these rates is given by the Fisher equation, which states:
\[ \text{Nominal Rate} = \text{Real Rate} + \text{Inflation Rate} \]
This equation helps investors, economists, and policymakers better understand the actual returns on investments and the real cost of borrowing. Answering "True" to the question would be correct based on this understanding.
Choose the appropriate answer by selecting either “True” or “False”.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4d6ce828-7421-4579-a347-7b809a44673d%2F3d965709-8a9d-4e80-8ba9-ee3e677c1781%2Faa5h4_processed.png&w=3840&q=75)
Transcribed Image Text:### Understanding Interest Rates: Nominal and Real
**Question:**
The nominal rate equals the real rate plus the inflation rate.
- ⭕ True
- ⭕ False
**Explanation:**
To better understand this, let's break down the concepts:
- **Nominal Rate:** This is the interest rate before adjusting for inflation. It's the rate that's typically advertised or quoted by banks and financial institutions.
- **Real Rate:** This is the interest rate that has been adjusted to remove the effects of inflation. It reflects the true cost of borrowing and the real yield to lenders.
- **Inflation Rate:** This is the rate at which prices for goods and services increase over time. It reduces the purchasing power of money.
The relationship between these rates is given by the Fisher equation, which states:
\[ \text{Nominal Rate} = \text{Real Rate} + \text{Inflation Rate} \]
This equation helps investors, economists, and policymakers better understand the actual returns on investments and the real cost of borrowing. Answering "True" to the question would be correct based on this understanding.
Choose the appropriate answer by selecting either “True” or “False”.
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