Suppose that the nominal interest rate in Japan is only 2.02.0 percent, while the comparable rate in the United States is 4.04.0 percent. Japan's rate of inflation is 0.50.5 percent while the U. S. inflation rate is 3.03.0 percent. Which economy has the higher real interest rate?

Japan

Explanation:

Data provided in the question

Japan Nominal interest rate = 2.0%

U. S Nominal interest rate = 4.0%

Japan inflation rate = 0.50%

U.S inflation rate = 3.0%

Now the formula to compute the real interest rate is

Real interest rate = Nominal interest rate - inflation rate

For Japan, it is

= 2% - 0.50%

= 1.50%

For U.S, it is

= 4.0% - 3.0%

= 1.0%

So as we can see that highest rate interest rate is 1.50% i.e of Japan