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Finance - Real Interest Rate

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I agree that the changes in real interest rates change in accordance with the change in the exchange rate. The nominal interest rate minus the inflation interest rate would be the real rate of return. This allows the investors to know whether or not they will have erosion through inflation or not.

My question is: Do you agree and why?

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Solution Summary

This solution explains how real interest rate is affected by changes in exchange rate. It also includes concepts such as nominal interest rate, inflation interest rate, and real rate of return. The sources used are also included in the solution. The explanation is given in 270 words with two references.

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I do not agree that changes in real interest rates change in accordance with the change in exchange rate. The relationship between the exchange rate and the interest rate represents the interest of external investors in the country. However, there are several other factors that affect the real interest rates. In general it is the demand for and supply of credit that determines real interest rate in a country.

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