ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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then the real interest rates is said to be 2.1%
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then the real interest rates is said to be 8.9%
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then the real interest rates is said to be-2.1%
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None of the above
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Detailed explanation-1: -To calculate a real interest rate, you subtract the inflation rate from the nominal interest rate. In mathematical terms we would phrase it this way: The real interest rate equals the nominal interest rate minus the inflation rate.
Detailed explanation-2: -We set monetary policy to achieve the Government’s target of keeping inflation at 2%. Low and stable inflation is good for the UK’s economy and it is our main monetary policy aim. We also support the Government’s other economic aims for growth and employment.
Detailed explanation-3: -The BoE aims to keep CPI at 2%.
Detailed explanation-4: -According to the Fisher effect, if inflation rises then the nominal interest rate rises. If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%. Inflation induces people to spend more resources maintaining lower money holdings.