ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Real interest rates are the current bank lending rates
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Real interest rates take into account inflation
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Real interest rates take into account changes in house prices
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Nominal rates are rates which only apply to borrowers and not lenders
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Detailed explanation-1: -The nominal interest rate portrays the financing cost with practically no rectification for the impacts of economic inflation. The real interest rates allude to the financing cost adapted to the effect of economic inflation.
Detailed explanation-2: -Simply put, the real interest rate is the nominal interest rate minus the inflation rate. For example, if a nominal interest rate was 2% and the inflation rate was 1%, the real interest rate would be 1%.
Detailed explanation-3: -The nominal value of any economic statistic means the statistic is measured in terms of actual prices that exist at the time. The real value refers to the same statistic after it has been adjusted for inflation.
Detailed explanation-4: -A nominal interest rate contains two parts: a real interest rate and an inflation premium. As an economy grows with inflation, the purchasing power of each dollar declines over time. Thus, the return that a lender earns for each dollar he lent before is actually lower than the rate stated in the contract.
Detailed explanation-5: -In the Fisher Effect, the nominal interest rate is the provided actual interest rate that reflects the monetary growth padded over time to a particular amount of money or currency owed to a financial lender. Real interest rate is the amount that mirrors the purchasing power of the borrowed money as it grows over time.