Question

Question One: Distinguish between the nominal and real rates of interest using an example.

Question Two: Why does an entrepreneur deserve to be compensated with profit?

Answer 1

a) The nominal interest rate is the rates which include inflation and real interest rate doesn't include any inflation. OR we can say nominal rates are the rates after taking inflation into account and real rates don't take inflation into account. For example, a bank is offering an interest rate of 10% in the economy. The inflation is 5%. Then, in that case, the nominal rates offered by the bank is 10% and real interest rates are only 5%.

b) An entrepreneur undertakes several efforts to carry on an economic activity. the profit is a return for all the risk taken and efforts done by the entrepreneur, for example, in return of land a person gets rent, for capital there are interests and for labor they get wages. For an entrepreneur, we have profit without which they will not have any incentive to undertake any economic activity.