Chapter 45, Problem 3MCQ

To determine

The correct option for depicting the impact on the real interest rate, due to the fall in the nominal interest rate and decrease in the aggregate price level of country M.

Answer to Problem 3MCQ

Option e is correct.

Explanation of Solution

Explanation for the correct option:

e.

The impact on the real interest rate cannot be determined as the inflation rate, and amount of output is not given. Therefore, option e is correct

Explanation for incorrect options:

a.

Decrease in the aggregate price level will affect the nominal interest rate but for a real rate inflation rate will be required. Therefore, option a is the incorrect answer.

b.

Increase or decrease in the real rate cannot be defined certainly without complete information. Therefore, option b is incorrect.

c.

Real interest rate will be changed if there is a change in the nominal interest rate but information about the inflation rate will be required. Therefore, option c is incorrect.

d.

Stability can also be not determined with insufficient information. Therefore, option d is incorrect.

Economics Concept Introduction

International trade: International trade is an exchange of goods and services across nations. This is due to globalization and comparative advantage. It means goods are produced in one country and are sold in some other country.