Let's says prices on average increase 6 percent each year. The State of Oregon allows rents to increase 7 percent each year (in nominal terms). Is the law allowing the rent to increase each year in real terms? Question 10 options:

a)

Yes

b)

No

c)

Neither in nominal nor real terms

a) Yes

Explanation:

An increase in real terms is when the real percentage increase in rent is a number greater than zero. The real rate is determined by subtracting the inflation rate from the nominal rate of interest.

Inflation refers to an increase in prices in the economy. If prices are increasing by 6 percent,  the inflation rate is also 6 percent.  The nominal rate of interest is the quoted rate. In this case, it is 7 percent.

The real rate of interest will be 7% - 6% = 1%.

Rent is increasing by a real rate of  1 percent per year.