Which of the following statement(s) is(are) true?I) The real rate of interest is determined by the supply and demand for funds.II) The real rate of interest is determined by the expected rate of inflation.III) The real rate of interest can be affected by actions of the Fed.IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
A) I and II only
B) I and III only
C) III and IV only
D) II and III only
E) I, II, III, and IV only

Question

Quizplus · Accepted Answer

The real rate of interest is indeed determined by the supply and demand for funds, and it can be affected by actions of the Federal Reserve (the Fed) through its monetary policy. The real rate of interest is not directly determined by the expected rate of inflation; rather, it is adjusted for inflation. The correct relationship between real interest rate, nominal interest rate, and inflation is given by the Fisher equation, which states that the real interest rate is approximately equal to the nominal interest rate minus the expected rate of inflation, not plus as stated in IV.

Which of the Following Statement(s) Is(are) True?I) the Real Rate