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.
Answer (1)
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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