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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%
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Solution

To determine the minimum real interest rate when the inflation rate is 2%, we can use the following relationship from economics:

Real Interest Rate=Nominal Interest RateInflation Rate \text{Real Interest Rate} = \text{Nominal Interest Rate} - \text{Inflation Rate}

  1. 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.
  2. Relevant Concepts

    • Real Interest Rate calculation formula as mentioned above.
  3. Analysis and Detail

    • To find the minimum real interest rate, we assume a scenario where the nominal interest rate is equal to the inflation rate, which means:

      Nominal Interest Rate=2% \text{Nominal Interest Rate} = 2\%

    • If we substitute this into the real interest rate formula:

      Real Interest Rate=2%2%=0% \text{Real Interest Rate} = 2\% - 2\% = 0\%

    • This implies that the real interest rate cannot be less than 0% if the inflation rate is 2%.

  4. 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%.

This problem has been solved

Similar Questions

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