CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

During an economic boom, the AD/AS model indicates that the real interest rate will ______ and real wage rates will ______.
A. increase; increase
B. increase; decrease
C. decrease; increase
Explanation: During an economic boom, there is high demand for goods and services and increased demand for resources such as labor. Thus, the price of labor (the real wage rate) will increase. To increase supply, more funds are needed. This increased demand for loanable funds will increase the real interest rate.

User Contributed Comments 2

User Comment
Lambo83 I answered C. Thinking that an economic boom will increase inflation and hence reduce the real interest rate, Nominal Rate - Inflation Rate. Does anyone agree answer C could also apply?
Dabuya Yes Lambo83 the inflation rate may increase, and nominal interest will increase too. However the question asks what happens to the REAL interest rate, which is determined by supply and demand of funds.
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