Final answer:
The nominal interest rate does not provide a more accurate rate of return than the real interest rate, because it does not adjust for inflation or deflation. Real interest rates reflect the true cost of borrowing and can affect economic stability and individual tax liabilities. option (A)
Step-by-step explanation:
The statement that the nominal interest rate shows you a more accurate rate of return than the real interest rate is False. The real interest rate is a more precise measure of the true cost of borrowing because it adjusts the nominal rate for inflation or deflation. If we have a nominal interest rate of 7% and the rate of inflation is 3%, the real interest rate that a borrower effectively pays is 4%. Conversely, if there is deflation of 2%, the real interest rate would be 9%.
It's important to understand that these real interest rates have a significant economic impact, potentially leading to uncertain loan repayment and issues for banks if deflation occurs. Furthermore, tax considerations can affect the actual gains from interest, as the U.S. income tax system charges on nominal interest without considering inflation, which could lead to a tax on interest that has not resulted in any real gain in buying power.