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    Eun's Avatar
    Eun Posts: 1, Reputation: 1
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    #1

    May 20, 2016, 07:05 PM
    Help me solve this(interest rate)
    The table shows detail of the nominal interest rate and the inflation rate for selected countries in July 2010.
    Country nominal interest rate inflation
    China 2.5 2.9
    India 5.7 13.9
    Indonesia 7.0 5.0
    Japan 0.2 1.1
    Pakistan 12.3 12.7
    What can be concluded from this information?
    A The cost of living was higher in India than in China.
    B The money rate of interest was higher in Indonesia than in Pakistan.
    C The real rate of interest was positive in Japan but negative in Pakistan.
    D The standard of living was higher in Indonesia than in India.

    Answer is C, but how?
    ebaines's Avatar
    ebaines Posts: 12,130, Reputation: 1307
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    #2

    May 21, 2016, 03:59 AM
    The "real rate of interest" is the difference between the nominal interest rate (what you get as return for buying bonds, say) and the rate of inflation. Usually the term used for this is "real rate of return." For example if someone pays you 5% interest for loaning them $100 for a year, but inflation is also 5%, then after one year you get $105 back from your investment but the buying power of that $105 is no greater than the the buying power of $100 was a year ago. Hence the "real" rate of interest is 0%. Here the real rate of interest in Japan is 0.2% - (-1.1%) = 1.3% and for Pakistan was 12.3% - 12.7 %= -0.4%. As for the other answers: interest rates and inflation rates tell you nothing about standard of living or cost of living, and answer B doesn't agree with the data.

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