suppose that real interest rates decrease across europe, what will happen to europe’s economy.
Real interest rates are the rate of return which the investors get after adjusting the inflation in the economy.
Real interest rates declines due to high inflation. so suppose that real interest rates decrease across europe. it won’t be good for europe’s economy because;
keeping other factors constant, due to lower real interest rate, europe won’t be an attractive destination for the foreign investors hence they will withdraw their money as a result demand for euro will decrease so euro will depreciate it will increase the import bill and resultingly the increased input cost will push the inflation further to rise. However to prevent the situation the central bank increases the policy rate as a result of which the nominal interest rate rise in short term Hans real interested also ships upward in short term and the increased policy rate at act as a check on the inflation in long term. So if comment does not intervene in the situation then decreased real interest rates will worsen the economic situation of the country
