If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate? (a) 7 percent(b) 5 percent (c) 3 percent(d) 3/5 percent

Option (A) is correct.

Explanation:

Given that,

Nominal interest rate = 5%

Deflation rate = 2 %

Real interest rate = Nominal interest rate + Deflation rate

                             = 5% +  2 %

                             = 7%

If a country is experiencing a deflation then the real interest rate is greater than the nominal interest rate.

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answer; rapid growth in buyer demand and high buyer switching cost;