Question

What is the distinction between the nominal interest rate and the real interest rate?

4.         In a diagram, show the effect on the real interest rate and amount of investment if people’s disposable income increases.

5.         Explain how a government budget deficit affects the market for loanable funds. What is the effect on investment? Ignore the possibility of a Ricardo-Barro effect.

6.         Before there is any international trade or international lending and borrowing, suppose the world real interest rate is less than the real interest rate within a nation. Once the nation is open to international trade and international lending and borrowing, will the nation’s net exports be negative or positive? Explain your answer.

Answer 1