Explain the Relationship Between the Cash Rate and the Real

question 11

Essay

Explain the relationship between the cash rate and the real cash rate. Illustrate your discussion by calculating the real rate of return for a 1-year term deposit that provides for the following 3-monthly interest rates over its term: 1 to 3 months - 5% p.a., 4 to 6 months - 7% p.a., 7 to 9 months - 6% p.a. and 10 to 12 months - 7% p.a. Inflation rates over this period are as follows: 1 to 3 months - 2% p.a., 4 to 6 months - 3% p.a., 7 to 9 months - 4% p.a. and 10 to 12 months - 5% p.a.

---

Definitions:

M1 Money Supply

This term describes a category of the money supply that includes all physical money like coins and currency, as well as demand deposits and other liquid assets held by the central bank.

Checkable Deposits

Bank accounts that allow the account holder to write checks or use electronic debit to access funds, including both checking and demand deposit accounts.

Federal Reserve Notes

The physical banknotes issued by the Federal Reserve, serving as the national currency of the United States.

Paper Money

Currency issued by a government or central bank in the form of paper notes and used as legal tender for transactions.