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Suppose that an economy is currently experiencing deflation of 2%. Assume that there is a zero...

Suppose that an economy is currently experiencing deflation of 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 + Deflation rate

Given, Deflation = 2%

Nominal interest rate is zero bound = 0%

Plug in these values in the equation above

Real interest rate = 0% + 2%

Real interest rate = 2

This is the minimum value of real interest rate = 2

Please contact if having any query thank you.

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