Question

In​ august, 1979, the annual rate of inflation in the u.s. was nearly​ 12%, and the u.s.​ short-term nominal interest rate was nearly​ 10%. over the next 35​ years, both the rate of inflation and​ short-term nominal interest rate tended to fall. by august​ 2014, the rate of inflation was about​ 2% and the​ short-term nominal interest rate was close to​ 0%. how has the real​ short-term interest rate changed from 1979 to​ 2014?
a. the real rate remained stable at minus−​2%.
b. the real rate declined by​ 10%.
c. the real rate increased by​ 10%.
d. the real rate remained stable at​ 2%.

Answer 1

Answer : a. the real rate remained stable at minus−​2%.

Explanation: Nominal rate = Real rate + inflation

Real rate = nominal rate - inflation

In 1970, real rate = 10%-12% = -2%

In 2014, real rate = 0%-2% = -2%

Hence the real rate remains constant at -2% throughout