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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

In recent years, economists have argued about the true value of the real interest rate at any one time and over time. Given that Nominal interest rate = Real interest rate + Expected inflation rate, it follows that Real interest rate = Nominal interest rate − Expected inflation rate. Why do you think that there is so much disagreement over the true value of the real interest rate?

To determine

The real interest rate.

Explanation

There is a practical difficulty involved in the computation of the real interest rate. Generally, the real interest rate is calculated as the difference between the nominal interest rate and the expected rate of inflation. However, it is not possible to accurately observe the expected rate of inflation. When the nominal inflation rate is 12 percent, though the expected inflation rate is included, however, the actual value of expected inflation rate is not known...

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