There is a link between inflation and interest rates, and this link is clear whe

Question

There is a link between inflation and interest rates, and this link is clear when we distinguish between nominal interest rates and real interest rates. When we purchase a bond, either directly or indirectly (through a mutual fund in a retirement plan or otherwise where we pay investment management fees for someone else to manage the investments), we are promised coupons (interest) on the bond until it matures, as well as the return of principal (our money) at the end. The nominal rate of inflation incorporates two components; _________ and _________.

Select one:

a. Nominal interest rate; Real inflation

b. Real interest rate; Expected inflation

c. Nominal interest rate; Nominal inflation

d. Real interest rate; Real inflation

Explanation / Answer

d. Real interest rate; Real inflation

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