If the nominal rate of interest on a deposit is 6 per cent and the rate of inflation is 8 per cent, the real rate of interest is:
- A.14 per cent
- B.2 per cent
- C.Minus 2 per cent
- D.8 per cent
Correct answer
Explanation
The correct answer is C, minus 2 per cent. The real rate of interest is the nominal rate less the rate of inflation, an approximation known as the Fisher equation. Here six per cent minus eight per cent gives minus two per cent, so the deposit grows in rupees but buys less at the end of the year than the original sum would have bought at the start. Savers lose in real terms whenever inflation is higher than the interest they earn, and that is a common condition in an economy with high inflation and administered deposit rates.
Option A adds the two rates instead of subtracting them. Option B subtracts in the wrong direction and gives a positive real return. Option D simply repeats the inflation rate and ignores the interest earned.
Read the full article: Inflation and Price Indices: WPI, CPI and Exam Notes
Practice Questions
View allWhich index does the Reserve Bank of India use to measure inflation for its inflation targeting framework?
- A.Wholesale Price Index
- B.Consumer Price Index (Combined)
- C.Index of Industrial Production
- D.GDP deflator
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When the flexible inflation targeting framework was adopted after the amendment of the Reserve Bank of India Act in 2016, the combined rural and urban consumer price index released by the National Statistical Office was made the nominal anchor, as the Urjit Patel Committee had recommended.
Read the full explanation →The Wholesale Price Index in India is compiled and released by which body?
- A.The Reserve Bank of India
- B.The Labour Bureau
- C.The Office of the Economic Adviser
- D.The National Statistical Office
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The wholesale price index is compiled and released every month by the Office of the Economic Adviser in the Department for Promotion of Industry and Internal Trade, under the Ministry of Commerce and Industry.
Read the full explanation →Inflation that is caused by aggregate demand rising faster than the supply of goods and services is called:
- A.Cost-push inflation
- B.Demand-pull inflation
- C.Structural inflation
- D.Imported inflation
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It is described in the classic phrase as too much money chasing too few goods.
Read the full explanation →A situation of high inflation along with stagnant growth and high unemployment is known as:
- A.Reflation
- B.Disinflation
- C.Stagflation
- D.Deflation
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The word joins stagnation and inflation, and it describes the awkward situation in which prices are rising fast while output is flat and unemployment is high.
Read the full explanation →During a period of high inflation, which of the following groups usually gains?
- A.Borrowers
- B.Lenders
- C.Pensioners
- D.Holders of fixed deposits
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A loan is repaid in a fixed number of rupees, and inflation reduces what those rupees can buy. The borrower therefore returns money of smaller real value than the money received, so the real burden of the debt falls.
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