The nominal rate of interest is the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders have no liquidity preference and all outcomes are certain.

Question

Quizplus · Accepted Answer

The statement is incorrect because the nominal interest rate represents the real interest rate plus the expected rate of inflation. In addition, assumptions such as no liquidity preference and uncertainty of outcomes do not exist in a perfect world, but rather reflect real-world conditions.

The Nominal Rate of Interest Is the Rate That Creates