Answer to Question #46842 in Macroeconomics for Tatenda
a) Determine the real rate of interest
b) Discuss two factors that lead to a change in the general level of interest rate
(1 + nominal rate) = (1 + real interest rate) (1 + inflation rate)
(1 + real interest rate) = (1 + nominal rate) / (1 + inflation rate)
Real interest rate = (1 + nominal rate) / (1 + inflation rate) – 1
Real interest rate = (1 + 0.1) / (1 + 0.06) – 1
Real interest rate = 0.038
Real interest rate = 3.8%
First of all, interest rates are influenced by the demand and supply of credit recourses. An increase in the demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them.
Also a great effect on interest rates has government, because it is the nation’s largest borrower. It can influence these rates with "open market transactions. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease.
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