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Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040

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BuyFindarrow_forward

Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040
Chapter 17, Problem 11SQ
Textbook Problem
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If the inflation rate exceeds the nominal rate of interest,

  1. a. the real interest rate is negative.
  2. b. lenders lose.
  3. c. savers lose.
  4. d. All of the above answers are correct.

To determine

The impact of the higher level of inflation than the nominal interest rate.

Explanation of Solution

An economic growth is an increase in the inflation adjusted market value of goods and services in the economy over the time period. A business cycle is a wave like upward and downward movement of GDP of the economy which moves from an economic drought to boom and back. An inflation in the economy is the abnormal increase in the average price level in the economy.

Option (d):

The real interest rate is obtained by deducting the inflation rate from the nominal interest rate in the economy. Thus, when the inflation rate is higher than the nominal interest rate in the economy, it means that the real interest rate will become a negative value. When the real interest rate is negative, both the lenders as well as the savers of the money will lose the value of their money. Thus, all the given statements are correct. Hence, option 'd' is the correct answer.

Option (a):

The real interest rate is obtained by deducting the inflation rate from the nominal interest rate in the economy. Thus, when the inflation rate is higher than the nominal interest rate in the economy, it means that the real interest rate will become a negative value...

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