What is the effect of a negative interest rate on the economy when the nominal interest...

What is the effect of a negative interest rate on the economy when the nominal interest rate is less than inflation rate

Expert Solution

ANSWER-

Negative interest rate means the borrower will get paid in the form interest instead of paying interest to lenders. It occurs when nominal interest rate falls below zero. When there is negative interest rate the bank charge interest for deposists rather than paying interest on deposits. This situation occurs because of deflation when people hold more money rather than spending it and it impact the whole economy in such a situation there is sharp delcine in demand and the prices which will reduce the production of ouput and increase the unemployemnt level in the economy. Then to handle such a situation loose monetary policy is employed.

CONCLUSION - the effect of a negative interest rate on the economy when the nominal interest rate is less than inflation rate is decline in demand for goods and services which reduces the price and reduce the production or even shutdown the production which in turn increase unemployemnt.

Rahul Sunny answered 2 years ago

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