Question

Answer Briefly:

A. During what period in the past 30 years were realized real rates of return negatives? What causes negative realized real rates of return?

B. Explain why interest move with changes in inflation.

Answer 1

A. Yes, realised real rate on return have been negative because of higher rate of inflation than the nominal interest rates in the economy and when there is a higher rate of inflation than the nominal interest rates in the economy it would be leading to a negative real interest rate.

These negative real interest rates of reflection of those period when inflation is higher than the nominal interest rate in the economy and either those are the recessionary period when Central Bank has cut down on the interest rates to almost zero zones or either they have been highly influential early period when the stimulation by keeping the lower interest rates have been done by the central banks.

B. Interest rate will be moving with change in inflation because interest rates are set by the central banks in accordance with the demand in the economy and it will be leading to proper and adequate money flow in the economy so monetary policies has been set in accordance with the bringing the money flow in the economy to the adequate levels through controlling of the inflation and hence it can be said that inflation and interest rates are complementary to each other.