Someone with dollar bills to lend will never agree to make a loan with a nominal interest rate of less than zero because:

It is mathematically impossible for the interest rate to be negative

The lender would not get any dollars back from the borrower

It would not be fair to lend money under such conditions

The lender is better off keeping the dollars than to agree to such a loan

Suppose that inflation is expected to be at –2% per year for the foreseeable future.

If the nominal interest rate is 0% per year, then the real interest rate is ****   per year.

The real interest rate can be calculated using the **Fisher equation**:

\[
\text{Real Interest Rate} = \text{Nominal Interest Rate} - \text{Inflation Rate}
\]

Given:  
- Nominal Interest Rate = 0%  
- Inflation Rate = -2% (deflation, meaning prices are falling)

Now substitute the values:

\[
\text{Real Interest Rate} = 0\% - (-2\%) = 0\% + 2\% = 2\%
\]

So, the **real interest rate** is **2% per year**. 

This means that even with a 0% nominal interest rate, the lender gains purchasing power due to the negative inflation rate (deflation). 

---

Would you like a deeper explanation of real vs. nominal interest rates or related concepts? 

Here are some follow-up questions for further exploration:  
1. What is the difference between nominal and real interest rates?  
2. How does deflation affect borrowers and lenders?  
3. Why might a borrower still accept a loan at 0% nominal interest with deflation?  
4. How do central banks respond to deflation with interest rate policies?  
5. Can a negative nominal interest rate exist, and what does that mean for lenders and borrowers?  

**Tip:** Real interest rates account for inflation, helping you understand the true gain or loss in purchasing power over time.

Someone with dollar bills to lend will never agree to make a loan with a nominal interest rate of less than zero because:

It is mathematically impossible for the interest rate to be negative

The lender would not get any dollars back from the borrower

It would not be fair to lend money under such conditions

The lender is better off keeping the dollars than to agree to such a loan

Suppose that inflation is expected to be at –2% per year for the foreseeable future.

If the nominal interest rate is 0% per year, then the real interest rate is **** per year.

Learn how to calculate the real interest rate when the nominal interest rate is 0% and inflation is -2% per year. This problem explains the Fisher Equation and its application in determining real interest rates. Suitable for high school students in Grades 10-12.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation