Question

Suppose that the nominal interest rate in Japan is only 5.0 percent, while the comparable rate in the United States is 7.0 percent. Japan's rate of inflation is 2.0 percent while the U.S inflation rate is 6.0 percent. Which economy has the higher real interest rate?

Answer 1

Answer: Japan has the higher real interest rate.

Step-by-step explanation:

Japan:

Nominal interest rate = 5%

Inflation rate = 2%

Real interest rate = Nominal interest rate - Inflation rate

= 5 - 2

= 3%

United States:

Nominal interest rate = 7%

Inflation rate = 6%

Real interest rate = Nominal interest rate - Inflation rate

= 7 - 6

= 1%

∴ Japan has the higher real interest rate.