High real interest rates can cause further economic contraction, making inflation negative and real interest rates even higher.

Question

Quizplus · Accepted Answer

High real interest rates increase the cost of borrowing, which can reduce investment and spending, leading to economic contraction. This can decrease demand, potentially causing deflation (negative inflation), which in effect makes real interest rates (nominal interest rate minus inflation) even higher, exacerbating the economic slowdown.

High Real Interest Rates Can Cause Further Economic Contraction, Making