If the nominal rate of interest on a deposit is 7 per cent and inflation is 6 per cent, the real rate of interest is about
- A.13 per cent
- B.7 per cent
- C.1 per cent
- D.6 per cent
Correct answer
Explanation
The correct answer is C, about 1 per cent. The real rate of interest is the nominal rate less the rate of inflation, so seven per cent minus six per cent leaves roughly one per cent. This is the relation stated by the Fisher equation, and it is what actually matters to a saver, because money that grows at seven per cent while prices rise at six per cent buys only about one per cent more goods at the end of the year.
Option A, thirteen per cent, comes from adding the two rates instead of subtracting, which is the commonest error. Option B, seven per cent, is the nominal rate itself and ignores inflation altogether. Option D, six per cent, is the inflation rate. Note that when inflation is higher than the nominal rate the real rate turns negative, which is what erodes the value of savings during a period of high prices.
Read the full article: Loans, Advances and Interest Rates: MCLR to NPA
Practice Questions
View allIn the context of rural credit and micro finance, KCC stands for:
- A.Krishi Credit Card
- B.Kisan Credit Card
- C.Krishi Credit Corporation
- D.Kisan Credit Corporation
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The Kisan Credit Card scheme was introduced in 1998 on the recommendation of the R V Gupta Committee and is worked by commercial banks, regional rural banks and cooperative banks.
Read the full explanation →Which model of self help group is also known as the international model?
- A.CDF model
- B.SEWAA model
- C.SAPAP model
- D.DWCRA model
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The South Asia Poverty Alleviation Programme model is called the international model of self help group formation because it was taken up with the support of the United Nations Development Programme and followed the same design across South Asian countries, beginning in India in the districts of Andhra Pradesh.
Read the full explanation →From which date did banks in India begin pricing new floating rate loans on the marginal cost of funds based lending rate, MCLR?
- A.1 July 2010
- B.1 April 2016
- C.1 October 2019
- D.1 April 2003
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The Reserve Bank introduced the MCLR from that date so that the price of a loan would follow the marginal, that is the latest, cost of raising funds rather than the average cost of old deposits.
Read the full explanation →The base rate system introduced by the Reserve Bank of India in July 2010 replaced which of the following?
- A.Marginal cost of funds based lending rate
- B.Benchmark Prime Lending Rate
- C.External benchmark lending rate
- D.Bank rate
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Under the BPLR system a bank announced a prime rate for its best customers and then lent to many borrowers below it, so the announced rate told a customer very little and the lending book was not transparent.
Read the full explanation →In which of the following charges on movable property does the possession of the goods remain with the borrower?
- A.Pledge
- B.Hypothecation
- C.Lien
- D.Mortgage
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In hypothecation a charge is created on movable property, such as a financed vehicle or the stock in a trader's shop, while the borrower keeps and uses the goods.
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