International Interest Rates the figure on international interest rates is below

Question

International Interest Rates

the figure on international interest rates is below. it shows rates for the US, Canada, and France declining by a big margin in the mid 70s, and then rebounding into postive territory in the mid 80s. answer 2 questions

1. why the decline in each country?
2. what caused the countries to rebound?

**No background info other then the text states that countries interest rates are connected to one another. My initial thought was that the great inflation period of the 70s may have caused the deciline, but I am not 100% sure.

rete. % USA -6 -8 -10 France Year Real interest rates in the three countries examined here follow the same broad pattern over time. (The real interest rate for each country is the nominal rate on 3-month government bonds minus inflation over the previous year.) Source International Monetary Fund Fisher equation

Explanation / Answer

Answer:

*inflation means increase in prices or decrease in purchasing power of money. Inflation occurs due to the increasing money supply in the economy because of low interest rates, high government spending etc.

** great inflation never cause interest rates to decline whereas central banks increases interest rates during inflation to reduce inflation rates.

*** Due to globalisation or international trade the countries are connected with each other and America being one of the most powerful nation any changes occurred in this economy affects the other countries also

hope it is clear to you.

Thank you.            

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