Why do real and nominal interest rates have opposite effects on the value of currency? Tried figuring this out online but no go…
Is it because the real interest rate is the actual rate you will get…so if it is high, it will attract investors, this demand will appreciate the currency because investors want to invest in countries with high real interest rate. Nominal interest, is a combination of real interest rate and expected inflation. So if the expected inflation is high, the currency will depreciate. How much expected inflation is on the Nominal interest rate. Maybe someone else can give it a go too…I curious to know other’s take on this.
I think that is a good explanation Adam. Nominal Rate = Real Rate + Inflation Keep this equation in mind and note the similarities to the basic accounting equation (A=L+E) and how that must always stay in balance.
Thanx a tom Adam…much appreciated.