Question

1. Long-term real interest rates across the world have declined by about 450bps over the past 30 years. Examine the main causes of the decline in the real rate and the main policy implications.

Answer 1

Solution:-

The main reason for declined Real interest rate above 30 year is Inflation. Inflation is the main problem in the economy. over 30 years the Rate of inflation increased very fast and that will decreased the Real interest rate. when inflation increase then the purchasing power of money is reduced so the people are investing less. the interest rate will become reduced as inflation increase. for example if nominal interest rate 5% and inflation 3% then real interest rate is 2%. but if inflation increase to 4% then Real interest rate declined to 1% .