Question

People anticipate the inflation rate to be​ 8%. Banks are making loans at a​ 12% interest rate.​ Therefore, A. the real rate of interest is​ 4% and the nominal rate is​ 12%. B. the real rate of interest is​ 12% and the nominal rate is​ 4%. C. the real rate of interest is​ 8% and the nominal rate is​ -4%. D. the real rate of interest is​ 12% and the nominal rate is​ 8%.

Answer 1

Answer:The correct answer is A

Step-by-step explanation:

Inflation is the persistent rise in the general price level of goods and services in an economy over a period of time.

Inflation in an economy could either be ordinary, persistent, Demand pull, Cost push, creeping, Galloping, or Hyper inflation. It can be caused by increase in wages and salaries, when demand is greater than supply, Excessive deficit financing or rapidly increasing government expenditure or budget.

The effect of inflation on the economy of a nation can be enormous. It includes Transfer of real earning from creditors to debtors, discouraged savings, loss of confidence in country's currency,fall in the standard of living.

The inflation in an economy can be controlled by monetary policy, such open market operation, Bank rate, cash reserve ratio, it can also be controlled by fiscal policy such as revenue and expenditure. It can also be measured by using method such as consumer price index, wholesale price index, GDP deflator/GDP index.