Suppose the inflation rate is 10% and the nominal interest rate on a ten year bond is 8%. The real interest rate on the ten year bond will be Group of answer choices decreasing negative zero positive increasing
Question
Suppose the inflation rate is 10% and the nominal interest rate on a ten year bond is 8%. The real interest rate on the ten year bond will be
Group of answer choices
decreasing
negative
zero
positive
increasing
Solution
The real interest rate can be calculated by subtracting the inflation rate from the nominal interest rate.
Step 1: Identify the given values. The inflation rate is 10% and the nominal interest rate is 8%.
Step 2: Use the formula for real interest rate, which is nominal interest rate - inflation rate.
Step 3: Substitute the given values into the formula. So, 8% - 10% = -2%.
Since the real interest rate is negative, the correct answer is "negative".
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