Comment on this statement: “People care about real interest rates, not nominalrates. Therefore, money demand should...

Comment on this statement: “People care about real interest rates, not nominalrates. Therefore, money demand should depend on the difference between the realrates on money and bonds, not the nominal rate on bonds."

Expert Solution

Real interest rates are the interest rates which are calculating after deducting the rate of inflation from nominal interest rates. Nominal interest are often the advertised rates or stated rates for funds without taking into consideration the inflation.

Real interest shows the real cost of funds for the borrowers and real yields to the lenders of the money. Note that, people would care more about real interest rates - both borrowers as well as the lenders. While borrowers can see the real cost of borrowing, investors are able to better see what is the real income they get and also predict their future positions.

Real interest rates can help understand the real interest rates on different alternatives and people can compare different source of funds taking into consideration their own risk appetite and cost considerations.

Thus, Money demand should depend on the difference between the real rates on money and bonds and not the nominal rate on bonds.

Rahul Sunny answered 8 months ago

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