- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 14. Aggregate Output, Prices, and Economic Growth
- Subject 5. Shifts in Aggregate Demand and Supply

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**CFA Practice Question**

If people expect that the nominal interest rate will be higher in the near future, the aggregate demand ______

A. will increase.

B. will decrease or stay at the same level.

C. could increase, decrease, or stay at the same level.

**Explanation:**It depends on the expected inflation rate. If it is higher than the expected increase of the nominal interest rate, the real interest rate is expected to go down and people will spend more. On the other hand, the aggregate demand will decrease. If the two rates are equal, the aggregate demand will stay unchanged.

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**User Contributed Comments**
6

User |
Comment |
---|---|

tiptop |
nominal interest rate - real interest rate = Inflation rate. If nominal interest rate is expected to be higher, and the real interest rate is unknown, we cannot determine whether people will spend more simply because we don't know what causes this increase in nominal rate, the inflation rate or the real rate. |

hoyleng |
Thanks tiptop |

vinoth84 |
Thanks Tiptop |

atlootah |
thanks tiptop |

kenthai |
For me it does not make sense, if people expect nominal interest rate to increase, they definitely reduce their C or Investment. This makes lower inflation. In the monetary policy, it works based on nominal interest rate, not real interest rate? Or am I wrong? |

caoqinghua |
can understand how the expected logic is, but it's far from reality |