Explore BrainMass
Share

Deflation: Real Interest Rates

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

1. What would happen to real short term interest rates if the economy is going through a global deflationary period?

2. Relative to Fama's Efficient Market Hypothesis, which of the following markets is the most efficient: equity, debt, or foreign exchange?

© BrainMass Inc. brainmass.com October 17, 2018, 5:25 am ad1c9bdddf
https://brainmass.com/business/interest-rates/deflation-real-interest-rates-568726

Solution Preview

In accordance with BrainMass standards, this is not a hand in ready assignment but only guidance.

Step 1
The real short term interest rates will decline if the economy is going through a deflationary period (a). First, deflation occurs if there is fall in aggregate demand. Fall in aggregate demand leads to lower demand for capital from businesses and this depresses real interest rates (b). Second, during deflationary period investment falls and this reduces the demand for loans and debt reducing real interest rates. Third, during deflationary period the central bank or the Federal Reserve reduces real ...

Solution Summary

This solution explains the changes in real interest rates during deflation. The sources used are also included in the solution.

$2.19
Similar Posting

I-bond advantages and disadvantages and the impact of inflation and deflation

Read "I-Bonds Adjust for Inflation"

1. What effect do you think the inflation-adjusted interest rate has on the price of an I-bond in comparison to similar bonds with no allowance for inflation?

2. What are some of the advantages and disadvantages of purchasing I-bonds over regular bonds?

3. What types of impacts to deflation and inflation have on I-bonds?

View Full Posting Details