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Question : Which one of the following statements is true regarding the rate of interest?

Option 1: The rate of interest may be zero.

Option 2: The rate of interest increases with economic growth.

Option 3: The rate of interest can not be determined.

Option 4: The rate of interest can not be zero.


Team Careers360 6th Jan, 2024
Answer (1)
Team Careers360 22nd Jan, 2024

Correct Answer: The rate of interest can not be zero.


Solution : The correct answer is The rate of interest can not be zero.

The rate of interest can never be zero due to the following factors:

  • Time Value of Money : Money available today is more valuable than the same amount in the future because it can be invested or used to earn returns.
  • Risk and Opportunity Cost : Lending involves risks, such as non-repayment and ties-up funds that could be used elsewhere. Interest accounts for these risks and the cost of not using the money differently.
  • Inflation : Inflation erodes the purchasing power of money over time. Positive interest rates provide a real return, counteracting the effects of inflation and making investments and savings worthwhile.

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