Question 1

Based on the graph, which of the following statements best describes the relationship between nominal and real interest rates in Canada from 1955 to 2018?

Accepted Answer

The nominal interest rate is always higher than the real interest rate, except during periods of deflation.

Question 2

During the late 1970s and early 1980s, the nominal interest rate in Canada spiked significantly. What is the most likely explanation for this increase, based on macroeconomic theory?

Accepted Answer

There was a period of high inflation, causing lenders to demand higher nominal rates to compensate for the loss of purchasing power.

Question 3

If the nominal interest rate is 8% and the inflation rate is 6%, what is the real interest rate according to the ex post formula?

Accepted Answer

$$r = i - \omega = 8\% - 6\% = 2\%$$

Question 4

According to the graph, what happened to real interest rates during the early 1980s in Canada?

Accepted Answer

They increased sharply, but not as much as nominal interest rates.

Question 5

Suppose the nominal interest rate is 4% and the expected inflation rate is 5%. What is the expected real interest rate (ex ante)?

Accepted Answer

$$r = i - \omega^e = 4\% - 5\% = -1\%$$

Question 6

What does it mean if the real interest rate is negative, as observed in some years on the graph?

Accepted Answer

The inflation rate exceeded the nominal interest rate, reducing the real value of savings.

Question 7

If a Canadian investor earned a nominal interest rate of 10% in 1981, but the inflation rate was 12%, what was the real return on their investment?

Accepted Answer

$$r = 10\% - 12\% = -2\%$$

Question 8

Which of the following best explains why nominal interest rates tend to be higher than real interest rates over time?

Accepted Answer

Nominal interest rates include a premium for expected inflation.

Question 9

During periods when the real interest rate is negative, what is the likely impact on borrowers and savers?

Accepted Answer

Borrowers benefit because they repay loans with money that is worth less, while savers lose purchasing power.

Question 10

If the nominal interest rate is 3% and the inflation rate is 0%, what is the real interest rate?

Accepted Answer

$$r = 3\% - 0\% = 3\%$$

Inflation, Interest Rates, and National Income Accounting in Macroeconomics

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