If the inflation rate is 2% then the real interest rate cannot be less than:Group of answer choices-2%2%1%0%
Question
If the inflation rate is 2% then the real interest rate cannot be less than:
- 2%
- 1%
- 0%
- 2%
Solution
To determine the minimum real interest rate when the inflation rate is 2%, we can use the following relationship from economics:
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Break Down the Problem
- Identify the nominal interest rate that would suffice given the inflation rate.
- Since the question asks for the minimum real interest rate, we need to analyze how a nominal interest rate can lead to a real interest rate that meets the inflation level.
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Relevant Concepts
- Real Interest Rate calculation formula as mentioned above.
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Analysis and Detail
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To find the minimum real interest rate, we assume a scenario where the nominal interest rate is equal to the inflation rate, which means:
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If we substitute this into the real interest rate formula:
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This implies that the real interest rate cannot be less than 0% if the inflation rate is 2%.
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Verify and Summarize
- We found that the real interest rate is 0% when the nominal interest rate equals the inflation rate.
- Therefore, it cannot be less than this value.
Final Answer
The real interest rate cannot be less than 0%.
Similar Questions
Suppose that in a given year, the rate of inflation is 3 percent, and the nominal interest rate is 2 percent. The real interest rate is:
Laura wants to get 8% in real return of her certificate of deposit. If the annual inflation rate is estimated at 2%, how much should her nominal interest be?
Inflation and nominal interest rates haveGroup of answer choicespositive relationinversely relatednegative relationno relation
If the borrower and lender agree to a loan at 8% when the inflation rate 3%, then 8% is the ________ interest rate and 5% is the _________ interest rate.
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