The price level has fallen since 1965. The price level in 1985 was lower than in 1980. The price level fell from 1980 to 1990. The price level has not fallen since 1965. The base year is 1965.
Parvez is trying to decide whether or not he should lend $1,000 to Eli for a year. If he does not lend the $1,000 to Eli, Parvez will purchase an indexed savings bond that pays an interest rate of 6 percent in real terms. If he puts the money into a savings account, he is better off holding his money as cash. He is indifferent between lending the money to Eli and buying the bond because the real interest rate is the same in either case. He should purchase the bond because it earns the highest real rate of interest. He earns the highest real rate of interest if he puts his $1,000 into a savings account.
If you borrow money at a nominal interest rate of 5 percent and the inflation rate is 10 percent, what real interest rate will you pay? -5 percent. 0.5 percent. 5 percent. 10 percent.