As inflation increases, for any fixed nominal interest rate, the real interest rate:
A) also increases.
B) remains the same, that's why it is real.
C) decreases.
D) decreases by less than the increase in inflation.

Question

Quizplus · Accepted Answer

As inflation increases, the purchasing power of a fixed nominal interest rate decreases. To compensate for the decrease in purchasing power, the market adjusts the real interest rate by decreasing it. Therefore, the real interest rate decreases as inflation increases.

As Inflation Increases, for Any Fixed Nominal Interest Rate, the Real