real-nominal interest rates (1 Viewer)

[symo]

if the inflation rate falls faster than the nominal rate of interest
1) real interest rates rise
2) real interest rates fall

real interest rates = nominal + inflation

then it would be 2) right?

 

[timmii]

real interest rates rise.

It is real = nominal - inflation.

If interest rates are 8%, and inflation is 3% real interest rates are 5%. If inflation falls by 1%, to 2% real interes rates rise to 6%.

If inflation fall by 2% to 1% and interest rates fall by less (ie by 1%) to 7%, real interest rates have still risen to 6%.

 

[symo]

cheers