Question

The market interest rate in Alpha is 7% and the market interest rate in Beta is 10%, but the inflation rate in Alpha is 3% and inflation rate in Beta is 8%. Which of the following statements is true?

A. The real interest rate is higher in Alpha, but the nominal interest rate is higher in Beta. B. The real interest rate is lower in Alpha, but the nominal interest rate is lower in Beta. C. Both the real and nominal interest rates are higher in Alpha. D. Both the real and nominal interest rates are higher in Beta.

Answer 1

A. The real interest rate is higher in Alpha, but the nominal interest rate is higher in Beta.

Step-by-step explanation:

Real interest rate: the interest rate after taking into consideration the inflation effect, which decreases the interest real return.

real-rate = nominal - inflation

Alpha: 7% - 3% = 4% real interest rate

Beta: 10% - 8% = 2% real interest rate

Alpha real interest rate is higher than Beta

alpha nominal rate: 7%

beta nominal rate: 10%

the Beta nominal rate is higher than Alpha.

This makes option A the only correct answer.