Given that the inflation rate in 2006 was about 3.24%,while a short term municipal bond offered a rate of 2.9%,which of the following statement is correct?

Question

Quizplus · Accepted Answer

The inflation rate of 3.24% is higher than the interest rate of 2.9% offered by the municipal bond. Therefore, the purchasing power of investors in these bonds decreased over the course of the year, meaning they were able to buy less at the end of the year than they could have purchased at the start of the year. Hence, statement C is correct. The real interest rate for investors in these bonds was less than the rate of inflation, making statement B incorrect. Furthermore, statement A is incorrect because the purchasing power of investors decreased, not grew. Lastly, statement D is incorrect because the nominal interest rate does not reflect the impact of inflation on the investor's purchasing power.

Given That the Inflation Rate in 2006 Was About 3