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Real interest rates vs nominal interest rates

  • Thread starter Aishwarya Khandelwal
  • Start date
A

Aishwarya Khandelwal

Member
"Real interest rates are probably more important than nominal interest rates. Investors expecting high inflation may also expect the government to increase real interest rates in response." I am not able to get my head around why this would be the case.
In one of the previous chapters it is stated that-
Nominal yield = risk free yield + expected inflation + inflation risk premium

So why government would increase real interest rates to counter high inflation?
 
Disclaimer: this is just my best opinion on it

If governments increase real interest rates, borrowing money becomes more expensive, people are more inclined to save and spending goes down. If spending goes down inflation also decreases. Interest and inflation have an inverse relationship.
 
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