Question

Explain why real interest rates may be different across countries?

Answer 1

Solution, :

Real interest rate differs in different countries. Basic reason behind it is the inflation of that country . Interest rate and inflation are inter related factors . Interest rate reflects inflation of that country . Central bank of a country decide s interest rate after considering rate of inflation in that country. High inflation prompts the central bank to raise the interest rate so that inflation can be brought down to a managable level. In developing countries where there is high inflation interest rates are kept high. On the other hand in developed countries where growth rate is low , inflation will be less as a result there will be less interest rate .