Author Question: Explain why high nominal interest rates in an economy does not necessarily mean real interest rates ... (Read 278 times)

Starlight · **on:** Jun 30, 2018

Explain why high nominal interest rates in an economy does not necessarily mean real interest rates in the same economy are also high.

What will be an ideal response?

Question 2

The GDP deflator measures

A) the quality of the goods and services in GDP.
B) the quantity level.
C) nominal GDP.
D) real GDP.
E) the price level.

Joc · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Real interest rates have been adjusted for inflation and are calculated as nominal interest rates minus the inflation rate. The higher the inflation rate, the lower the real rate of interest, so high nominal interest rates do not always mean high real interest rates. For example, if the nominal interest rate is 12 percent, and the inflation rate is 9 percent, the real interest rate is only 3 percent.

Answer to Question 2

E