Question

Suppose the nominal interest rate is 20 percent, and the inflation rate is 0.2%. What is the real interest rate? How could you alter this example so that the real interest rate is 0?

Answer 1

The real interest rate is 19.8%. To make the real interest rate 0%, the inflation rate should be equal to the nominal interest rate.

Step-by-step explanation:

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the nominal interest rate is 20% and the inflation rate is 0.2%. Therefore, the real interest rate would be 19.8% (20% - 0.2% = 19.8%).

To alter the example so that the real interest rate is 0, we would need to have an inflation rate equal to the nominal interest rate. Let's say the nominal interest rate is 10% and the inflation rate is also 10%. In this case, the real interest rate would be 0% (10% - 10% = 0%).