Final answer:
The nominal interest rate minus the inflation rate equals the real interest rate. A budget deficit is a yearly shortfall while national debt is the cumulative borrowing. The savings-investment spending identity states that savings must equal investment, represented by the equation S = I.
Step-by-step explanation:
Relationship Between Nominal Interest Rate and Inflation Rate
The relationship between the nominal interest rate and the inflation rate can be understood through the real interest rate, which is the nominal rate minus the inflation rate. For instance, if the nominal interest rate is 7% and the inflation rate is 3%, the real interest rate is 4%. However, if there is deflation of 2%, the real interest rate becomes 9%. Unexpected deflation can cause real interest payments to rise unexpectedly, leading to financial stresses for borrowers and potentially triggering a recession.
Difference Between Budget Deficit and National Debt
A budget deficit occurs when a government's expenditures exceed its revenues in a given fiscal year. The national debt, on the other hand, is the cumulative amount of money that the government owes as a result of past budget deficits, less any budget surpluses. Essentially, the national debt is the total of all past budget deficits and surpluses.
Savings-Investment Spending Identity
The savings-investment spending identity is an economic principle that states that savings (S) must equal investment (I). The equation can be expressed as S = I. In scenarios where Ricardian equivalence holds, changes in the budget deficit will be offset by changes in private savings or in the trade deficit so that the identity still holds true.