Suppose the nominal interest rate is 10%.The rate of inflation has been 4% and is expected to continue at 4% in the future.The real interest rate,which determines the firm's decision to purchase capital,is therefore

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Quizplus · Accepted Answer

The real interest rate is calculated as nominal interest rate - inflation rate. So, the real interest rate in this case is 10% - 4% = 6%. This is the rate that will determine the firm's decision to purchase capital, as it represents the true cost of borrowing after accounting for inflation.

Suppose the Nominal Interest Rate Is 10