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 money decreases. Therefore, if the nominal interest rate remains fixed, the real interest rate (nominal interest rate adjusted for inflation) will decrease proportionally. This is because lenders will demand a higher nominal interest rate to compensate for the loss of purchasing power caused by inflation.

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