Question

Suppose that the interest rate in Japan is only $2$percent, while the comparable rate in the United States is localid="1651988274892" $4$percent. Japan's rate of inflation is $0.5$percent, while the U.S. inflation rate is $3$percent. Which economy has the higher real interest rate?

Short answer

The real interest rate in U.S. is $1$percent $(4-3=1)$. Thus, Japan has relatively higher real interest rate.

Step-by-step solution

Introduction

An interest rate is the amount of interest due each period, given as a percentage of the amount lent, deposited, or borrowed (called the principal sum). The principal amount, interest rate, compounding frequency, and length of time it is lent, deposited, or borrowed influence the total interest paid on a loan or a loan.

Explanation 

Comparing interest rates can be used to calculate interest rate differentials. To compare the higher interest rate, we must calculate the difference between the interest rates.

The real interest rate in Japan is $1.5$percent $(2-0.5=1.5)$.

In the United States, the actual interest rate is $1$percent$(4-3=1)$.

Japan has a higher real interest rate of percent when compared to the rate of inflation.