Which of the following statement is true?

Question

BlackTom AI · Accepted Answer

Let's evaluate each statement in turn to see whether it holds true in standard macro and financial theory.
Option 1: 'Inflation has no effect on the nominal rate of interest.' This is incorrect because, according to the Fisher equation, the nominal rate i is approximately the sum of the real rate r and expected inflation π (i ≈ r + π). If inflation changes, the nominal rate typically changes as well, even if the real rate stays the same.
Option 2: 'Government budget deficit drives the interest rate down.' In macroeconomics, a larger budget deficit is usually associated with higher borrowing to finance the deficit, which tends to raise, not lower, interest rates due to increased demand for loanable funds and potential crowding-out effects. Therefore this statement is generally false.
Option 3: 'Certificates of deposit offer a guaranteed real rate of interest.' A certificate of deposit typically offers a fixed nominal rate, but the real rate depends on actual inflation over the period. If inflation rises above the fixed nominal yield, the realized real rate can be negative. Thus this claim is not guaranteed and is false in general.
Option 4: 'Real rate can never take a negative value.' Real interest rates can indeed be negative when inflation exceeds the nominal rate, so this statement is false.
Option 5: 'None of the options is true.' Since all prior statements are inaccurate or misleading under standard theories, this one correctly asserts that none of the previous statements holds true in general.

BFF3121 - S2 2025 Chapter 5 Review Quiz

Which of the following statement is true?

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BFF3121 - S2 2025 Chapter 5 Review Quiz

Which of the following statement is true?

View Explanation

Log in for full answers

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