Which statement is TRUE?

Question

Quizplus · Accepted Answer

The relationship between the nominal rate of interest, real rate of interest, and inflation is given by the Fisher equation, which states that the nominal rate of interest is approximately equal to the real rate of interest plus the rate of inflation. Therefore, option A is true.

Option B is incorrect because the nominal rate of interest merely measures the rate at which the value of money grows over time due to interest. It does not necessarily indicate an improvement in purchasing power, as inflation can erode the value of money over time, leading to a decrease in purchasing power.

Option C is incorrect because the real rate of interest is typically lower than the rate of inflation, not higher.

Option D is also incorrect, as it is the real rate of interest that deducts inflation from the nominal rate of interest. As a result, the real rate of interest is lower than the nominal rate of interest when there is inflation.

Which Statement Is TRUE