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22 April, 12:43

Your friend has just started a savings account that is currently paying 5% interest. If inflation is expected to be 7% this next year, your friend will be earning a

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  1. 22 April, 12:57
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    If inflation is expected to be 7% this next year, your friend will be earning a - 2% interest.

    Step-by-step explanation:

    Real interest rate is the interest rate that takes inflation into account. To calculate for the real interest rate, we have:

    Real interest rate = nominal interest rate - inflation rate

    Real interest rate = 5% - 7%

    Real interest rate = - 2%

    In this case, the borrower will get paid and your friend will be the one penalized.

    Negative interest rates occur infrequently and usually only when a country's central bankers are forced to utilize the monetary policy tool - - where the interest rates are set below zero - - during harsh economic times.
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