Question

Brazil keeps interest rates on hold

​Brazil's inflation rate climbed to 10.7 percent at the end of 2015 and the​ country's Monetary Policy Committee kept its benchmark interest rate at 14.25 percent.

To maintain the real interest rate at its end of 2015​ value, how must the nominal interest rate change if the inflation rate falls to 4.5 percent a​ year?

To maintain real interest​ rate, the nominal interest rate must​ ______ if the inflation rate falls to 4.5 percent a year.

A.

fall by 6.2 percent

B.

rise by 6.2 percent

C.

remain constant

D.

fall by 4.5 percent

E.

rise by 4.5 percent

Answer 1

Real interest rate originally= Nominal rate- Inflation

=14.25%-10.7%=3.55%

We need to maintain same interest rate when inflation rate falls by 4.5%

Real interest rate =3.55%=Nominal Rate-6.2%

Nominal rate=9.75%

Nominal rate change =9.75%-14.25%=-4.5%

Nominal rate falls by 4.5%

Hence option E is correct