Price level is constant and the nominal rate of interest

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1. In year 1 the price level is constant and the nominal rate of interest is 6 percent. But in year 2 the inflation rate is 3 percent. If the real rate of interest is to remain at the same level in year 2 as it was in year 1, then in year 2 the nominal interest rate must:

A. rise by 9 percentage points.

B. rise by 3 percentage points.

C. fall by 3 percentage points.

D. rise by 6 percentage points.

2. The XYZ Corporation can make a real (inflation-adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the:

A. investment will be profitable.

B. investment will be unprofitable.

C. real rate of interest is 4 percent.

D. real rate of interest is 2 percent.

Reference no: EM13773860

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