Mock 2 - Nominal & Real Interest Rates

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topher

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Which of the following is the most accurate description of the determination of interest rates?

a. the real interest rate is determined in the money market
b. the nominal interest rate is determined in the capital market
c. the real interest rate equals the nominal interest rate minus the expected inflation rate
d. the nominal interest rate equals the real interest rate plus the unexpected inflation rate



Edited 1 time(s). Last edit at Thursday, June 5, 2008 at 10:16PM by topher.
 
C and D are saying the same thing.

i'd say b.
 
or may be A.
bubble B first, then erase, then make it on A.
 
pepp Wrote:
-------------------------------------------------------
> C and D are saying the same thing.
>
> i'd say b.


wrong, read again
 
C is the correct answer.

But anyway i have beef with this problem.
This is the relation as I understand it:
1+NomRFR = (1+RealRFR)(1+ExpInf)


C is saying
NomRFR = RealRFR + ExpInf


The first relationship is slightly different from the second. so to say that the nominal rfr EQUALS the real rfr + expected inflation is not correct. It's an approximation.
 
god, i am not able to keep focus. getting silly questions wrong.

C.
 
I also don't like it when they say it's simply plus or minus when it's really a growth product
 
Here's the real question....

... what does determine the real and nominal interest rates!
 
C is what i put too

I really wish the mock test gave a list of the questions I got wrong.
 
yeah i got it wrong because of my reasoning above...
 
i'd say A. c and d are both wrong.

because the supply of money drives the interest rates.

a good example is the crowding out effect: greater govt deficits (meaning more spending and more money in circulation) drive up interest rates (this also reduces private investment btw)

what's the answer?
 
I would go with A. Central banks look at bonds for interest rate and at labor for inflation.
 
The real interest rate is determined by investment demand and savings supply.
Nominal interest rate is determined by the supply and demand of money.
 
demand for money = rates

supply == controlled by Fed

bring it
 
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