Question

Your friend has just started a savings account that is currently paying 5% interest. If inflation is expected to be 7% this next year, your friend will be earning a

Answer 1

Answer:

If inflation is expected to be 7% this next year, your friend will be earning a -2% interest.

Step-by-step explanation:

Real interest rate is the interest rate that takes inflation into account. To calculate for the real interest rate, we have:

Real interest rate = nominal interest rate - inflation rate

Real interest rate = 5% - 7%

Real interest rate = -2%

In this case, the borrower will get paid and your friend will be the one penalized.

Negative interest rates occur infrequently and usually only when a country's central bankers are forced to utilize the monetary policy tool -- where the interest rates are set below zero -- during harsh economic times.

Answer 2

The friend will be earning–(2)%.

The friend has just started a savings account that is currently paying 5% interest. If inflation is expected to be 7% this next year, friend will be earning–(2)%.

Further explanation:

Real interest rate:

It is an interest rate that is being allowed by the saver, investor receives after allowing the inflation.

Calculate the real interest rate:

Real interest rate = Nominal interest rate - Inflation rate

Real interest rate = 5% - 7%

Real interest rate = -2%

The borrower will get paid and a friend will be penalized.

Negative interest rates occur only when central banks are forced to utilize the monetary policy tool.

Thus, the friend has just started a savings account that is currently paying 5% interest. If inflation is expected to be 7% this next year, friend will be earning –(2)%.

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Answer details:

Grade: High School

Subject: Economics

Chapter: Inflation

Keywords: Your friend has just started a savings account that is currently paying 5% interest. If inflation is expected to be 7% this next year, your friend will be earning a, penalized, real interest rate, negative interest rates.