Economics Monetary Policy Questions
The real interest rate in monetary policy refers to the interest rate adjusted for inflation. It represents the true cost of borrowing or the return on saving after accounting for the effects of inflation. The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. It is an important indicator for central banks and policymakers as it helps determine the effectiveness of monetary policy in stimulating or restraining economic activity. A higher real interest rate indicates tighter monetary policy, which can help control inflation but may also slow down economic growth. Conversely, a lower real interest rate can stimulate borrowing and investment, promoting economic expansion.