Question

Interest rates were lower in the mid-1980s than in the late 1970s, yet many economists have commented that real interest rates were actually much higher in the mid1980s than in the late 1970s. Does this make sense? Do you think that these economists are right?

Short answer

The economists were right, that real interest rate higher in mid 1980s.

Step-by-step solution

Step 1. Introduction

Nominal interest rate refers to the advertised or reported interest rate on a loan that does not include any fees or compounding of interest.

Step 2. Explanation

Economists are correct in their assessments. They claim that nominal interest rates were lower than expected inflation rates in the late 1970s, resulting in negative real interest rates. Predicted inflation, on the other hand, fell significantly faster than nominal interest rates in the mid-1980s, resulting in nominal interest rates being higher than expected inflation and real rates being positive.