Question

Historically, why were high inflation rates associated with high nominal interest​ rates? A. High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. B. The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present. C. Growth in investment and savings is encouraged when consumers are judged to be overspending. D. Individuals will spend more when they expect their investments to increase in value.

Answer 1

Answer: the correct answer is B. The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

Explanation:

Sensible individuals are always looking for a profit in their savings but if inflation rate is high the real interest rate might be very low or simply disappear. Loan institutions offer higher interest rates taking into account inflation rate so individuals have an incentive to save.