he annual inflation rate in February 2022 was close to 8%. If the average nominal interest rate at that point was nearly 0.3%, then real interest rate must be

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22-07-2022
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he annual inflation rate in February 2022 was close to 8%. If the average nominal interest rate at that point was nearly 0.3%, then real interest rate must be

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Tutorconsortium351 Tutorconsortium351 · Answer 1 · 2022-07-30T18:38:09+02:00

The annual inflation rate in February 2022 was close to 8%. If the average nominal interest rate at that point was nearly 0.3%, then real interest rate must be the actual interest earned (or paid) will depend on the nominal interest rate and how much the inflation rate turned out to be.

What is the annual inflation rate?

Annual inflation is the percentage change in the CPI from the same month the year before.

The real interest rate, as opposed to the nominal rate, accounts for inflation. Nominal rate = real interest rate + inflation rate, or nominal rate - inflation rate = real interest rate, is a rough approximation of the relationship between nominal and real interest rates.

In February 2022, the yearly inflation rate was around 8%. Since the average nominal interest rate at that time was almost 0.3 percent, the real interest rate must be determined by the nominal interest rate and the amount of inflation that actually occurred. According to The Economics Daily and the U.S. Bureau of Labor Statistics, consumer prices increased 8.6% over the prior year as of May 2022.

The nominal interest rate and the amount of inflation that really occurred will determine the actual interest earned (or paid).

The possibility of negative nominal and real interest rates confounds some individuals. Real interest rates, as opposed to nominal interest rates, can be negative.
When the inflation rate exceeds the nominal interest rate, real interest rates turn negative.
Nominal interest rates are not allowed to be negative because if they were, banks would be paying you to borrow money! The nominal interest rate can only decrease to 0% 0% 0%, which is known as the "zero bound" on interest rates.

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