ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Low interest rates lead to people borrowing more from banks and saving less. This increases the supply of money in the economy and also the demand. As a result, prices of the commodities rise and cause inflation. In this scenario, the RBI tends to increase the interest rates to reduce the money supply.

Detailed explanation-2: -Answer and Explanation: It is given in the question that the nominal interest rate is 8 per cent, and the current inflation rate is 3 per cent. Therefore, the real interest will be 5 percent. It is because the real interest rate is the difference between the nominal interest rate and the inflation rate.

Detailed explanation-3: -The inflation rate t +1 is defined-as usual-as the percentage change in the price level from period t to period t + 1. t +1 = (P t +1 − P t)/P t. If a period is one year, then the price level next year is equal to the price this year multiplied by (1 + ): P t +1 = (1 + t) × P t.

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.