In august, 1979, the annual rate of inflation in the u. s. was nearly 12%, and the u. s. short-term nominal interest rate was nearly 10%. over the next 35 years, both the rate of inflation and short-term nominal interest rate tended to fall. by august 2014, the rate of inflation was about 2% and the short-term nominal interest rate was close to 0%. how has the real short-term interest rate changed from 1979 to 2014?

a. the real rate remained stable at minus- 2%.

b. the real rate declined by 10%.

c. the real rate increased by 10%.

d. the real rate remained stable at 2%.

Question

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Jaime James

29 March, 08:50

In august, 1979, the annual rate of inflation in the u. s. was nearly 12%, and the u. s. short-term nominal interest rate was nearly 10%. over the next 35 years, both the rate of inflation and short-term nominal interest rate tended to fall. by august 2014, the rate of inflation was about 2% and the short-term nominal interest rate was close to 0%. how has the real short-term interest rate changed from 1979 to 2014?

a. the real rate remained stable at minus- 2%.

b. the real rate declined by 10%.

c. the real rate increased by 10%.

d. the real rate remained stable at 2%.

+1

Answers (1)

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Toby Becker · Answer 1

Answer : a. the real rate remained stable at minus- 2%.

Explanation: Nominal rate = Real rate + inflation

Real rate = nominal rate - inflation

In 1970, real rate = 10%-12% = - 2%

In 2014, real rate = 0%-2% = - 2%

Hence the real rate remains constant at - 2% throughout