When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

Question

BlackTom AI · Accepted Answer

Real interest rate measures the true cost of borrowing and the true return to lending after adjusting for inflation, so when the real rate is low, borrowing is cheaper and lending yields a smaller real return.

1) Relevant knowledge points and concepts
- Nominal interest rate = stated rate on a loan.
- Real interest rate ≈ nominal rate − inflation rate. It reflects purchasing-power change.
- Borrowers care about the real cost of repaying (lower real rates reduce future purchasing-power cost).
- Lenders care about the real return (lower real rates reduce incentive to lend).

2) Step-by-step reasoning
- If the real interest rate falls, the borrower repays with money that has nearly the same (or less) purchasing power relative to what was borrowed, so borrowing becomes more attractive.
- Simultaneously, lenders receive a smaller increase in purchasing power (or even a loss if real rate is negative), so they are less inclined to lend.

3) Calculations with intermediate steps (numeric example)
- Suppose nominal rate = 5% and inflation = 3% → real rate = 5% − 3% = 2%.
- If inflation rises to 6% but nominal stays 5% → real rate = 5% − 6% = −1%.
- At real = −1%: borrower repays with money worth less than when borrowed (effective cost negative) → strong incentive to borrow. Lender’s real return is −1% → strong disincentive to lend.

4) Why the correct answer is correct
- The statement asks which interest-rate concept matters for incentives to borrow or lend: the real rate determines purchasing-power cost/return. Low real rates increase borrowing incentives and decrease lending incentives. That matches option b: “real; borrow; lend.”

5) Why other options are incorrect
- a (real; lend; borrow) reverses the incentives.
- c (nominal; lend; borrow) focuses on nominal rates, which ignore inflation and thus misstate real incentives.
- d (“market”) is vague and does not capture the inflation adjustment needed to assess incentives.

6) Conclusion
- Therefore the correct choice is b. real; borrow; lend, which matches the provided answer.

When the interest rate is low, there are greater incentives to and fewer incentives to .单项选择题

类似问题

Compared to long-term government bonds, interest rates on three-month Treasury bills fluctuate and are on average.

The Fisher effect is used to demonstrate a strong correlation between inflation rates and

[table] Year | Year1 | Year2 | Year3 | Year4 | Year5 Short Rate ri | 4.00% | 6.00% | 5.00% | 3.00% | 2.00% [/table]The following Treasury Short Rates were the general market expectations for the near-term. Which of the following statement during these 5 years is most correct?

The US 10-Yr Treasury Rate is 4.2%, inflation in Peru is 9% and the inflation rate in the US is 3%. Using the interest rate arbitrage approach, what is the risk-free rate in Peru.[Fill in the blank]

Suppose the nominal interest rate is 10 percent, the tax rate on interest income is 28 percent, and the inflation rate is 6 percent. Then the after-tax real interest rate is -3.2 percent.

The nominal interest rate is 6 percent and the real interest rate is 2.5 percent. What is the inflation rate?

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.单项选择题