3. The role of inflation and real versus nominal interest rates

Which of the following are likely consequences of rising inflation? Check all that apply.

A misallocation of resources

A distorted price-signaling mechanism

Savers wanting to save more and borrowers wanting to borrow less

A redistribution of wealth away from the wealthy to those who depend on wages and salaries

Suppose the nominal interest rate is 8% and the inflation rate is 2.5%, and then the real interest rate is

.

Maria considers investing in the green energy industry and compares the following two options:

1.	One-year bonds issued by Golden Power, a producer of solar batteries based in Canada, that pay a nominal interest rate of 8%
2.	One-year bonds issued by iRain, a producer of rainwater harvesting system based in New Zealand, that pay a nominal interest rate of 8.8%

A thorough study has shown that the economic situation and prospects in Canada and New Zealand are very similar. Nevertheless, Maria decides to invest in Golden Power. Ceteris paribus, which of the following best explains Maria's choice?

Inflation in New Zealand is more than 0.8% higher than in Canada.

Canada has more renewable resources than New Zealand.

Real interest rate in Canada is lower than in New Zealand.

Unemployment rates in Canada are lower than in New Zealand.

Inflation in Canada is more than 0.8% higher than in New Zealand.