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Suppose that inflation in an economy is currently 2%. Assume that there is a zero lower...

Suppose that inflation in an economy is currently 2%. Assume that there is a zero lower bound on nominal interest rates. Accordingly, the lowest the real interest rate can be is (enter your answer as a number. For example, if your answer is 5%, just enter 5. If negative, make sure to place the minus sign in front).

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Answer #1

Real Interest rate = Nominal Interest rate - Inflation rate.

Since, nominal interest rate has a zero lower bound, thus, lowest real interest rate in the economy given the inflation rate of 2 per cent = 0 - 2 = -2 per cent.

Thus, the lowest real interest rate in the economy = -2 per cent.

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