If over the course of a year the inflation rate was about 3.24%, and short-term government bonds offered a rate of 2.9%, which of the following statement is correct?
A)Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
B)The real interest rate for investors in these bonds was greater than the rate of inflation.
C)The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.
D)The purchasing power of investors in these bonds grew over the course of the year.

Question

Quizplus · Accepted Answer

The inflation rate of 3.24% was higher than the 2.9% interest rate offered by the bonds, so investors would have lost purchasing power over the year. Option B is incorrect because the real interest rate, which factors in inflation, was negative. Option C is incorrect because the nominal interest rate does not factor in inflation. Option D is incorrect because the purchasing power decreased, as stated in option A.

If Over the Course of a Year the Inflation Rate