How are interest rates and inflation rates related? What will ...

[renzo156]

How are interest rates and inflation rates related?
 
  What will be an ideal response?

Question 2

One of the major issues that arose during the Doha round of negotiations involved complaints by ________ about ________.
 
  A) developing countries; agricultural subsidies.
  B) manufacturers; intellectual property
  C) industrialized countries; enforcement of contracts
  D) Eastern European countries; European Union tariffs
  E) South and Central American countries; domestic content requirements

[blakcmamba]

Answer to Question 1

If investors in one country worry that their domestic inflation may rise, we would expect interest rates to rise in that country to compensate for the greater inflation, as otherwise the investors would be caught receiving negative real rates of return. Imagine, for example, a country with high inflation and low interest rates. Under such conditions, investors would be receiving negative real rates of return, and will correspondingly avoid investing in that country's bonds, recurring instead to investing in real estate, foreign currencies or precious metals; hoping that the value of these investments will rise at least at the same pace as inflation. Naturally, this would not be equilibrium, and interest rates would have to rise until real interest rates become positive. In summary, interest rates and inflation rates will generally move in tandem, so as to keep real interest rates relatively constant.

Answer to Question 2

A

[renzo156]

Excellent

[bdobbins]

Gracias!