Question

What is the real interest rate if the nominal interest rate is 1 when the rate of inflation is 2

Answer 1

Answer:

Real interest rate = -1%

Step-by-step explanation:

Real interest rate=Nominal interest rate - inflation rate

From the above,

Nominal interest rate=1%

Inflation rate=2%

Real interest rate=Nominal interest rate - inflation rate

=1% - 2%

= -1%

Real interest rate = -1%

Real interest rate shows you what it really costs borrowers to pay back their loans.

if the real interest rate is greater than zero, the amount you pay back is worth more in real terms than the money you borrowed.

if the real interest rate is below zero as in the above case, the amount you will pay back is less worth in real terms than the money you borrowed.