Suppose that Shonda borrows $20,000 to purchase a car. The bank charges her a nominal interest rate of 9%. If the inflation rate decreases from 4% to 3%, which of the following is true? OA decrease in inflation decreases the real interest rate and hence decreases the real cost of borrowing. OA decrease in inflation increases the real interest rate and hence decreases the real cost of borrowing. The nominal interest rate does not change and hence the real cost of borrowing remains the same. OA decrease in inflation increases the real interest rate and hence increases the real cost of borrowing.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Suppose that Shonda borrows $20,000
to purchase a car. The bank charges her
a nominal interest rate of 9%. If the
inflation rate decreases from 4% to 3%,
which of the following is true?
OA decrease in inflation decreases the
real interest rate and hence decreases
the real cost of borrowing.
OA decrease in inflation increases the real
interest rate and hence decreases the
real cost of borrowing.
O The nominal interest rate does not
change and hence the real cost of
borrowing remains the same.
O A decrease in inflation increases the real
interest rate and hence increases the
real cost of borrowing.
Transcribed Image Text:Suppose that Shonda borrows $20,000 to purchase a car. The bank charges her a nominal interest rate of 9%. If the inflation rate decreases from 4% to 3%, which of the following is true? OA decrease in inflation decreases the real interest rate and hence decreases the real cost of borrowing. OA decrease in inflation increases the real interest rate and hence decreases the real cost of borrowing. O The nominal interest rate does not change and hence the real cost of borrowing remains the same. O A decrease in inflation increases the real interest rate and hence increases the real cost of borrowing.
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