If the rate of inflation is -2 percent, the output gap is -5 percent, the nominal interest rate is 5 percent, and the unemployment rate is 8 percent, the real interest rate is 3 percent.

Question

Quizplus · Accepted Answer

The calculation for real interest rate is (nominal interest rate - inflation rate) - output gap. Therefore, in this scenario, the real interest rate is 10% (5% - (-2%) - (-5%)).

If the Rate of Inflation Is -2 Percent, the Output