Suppose the U.S.public holds $1 trillion in government bonds,all with an 8 percent nominal interest rate.If the Federal Reserve can hold that nominal rate constant,what inflation rate would make the government's net interest expense exactly zero?

Question

Quizplus · Accepted Answer

The government's net interest expense would be zero if the real interest rate is zero. With an 8% nominal interest rate, an 8% inflation rate would result in a 0% real interest rate (nominal rate - inflation rate = real rate).