Which of the following decreases the real interest rate?
A) an increase in the nominal interest rate, holding the inflation rate constant
B) an increase in both the nominal interest rate and the inflation rate by the same percentage points
C) an increase in the inflation rate, holding the nominal interest rate constant
D) a decrease in both the nominal interest rate and the inflation rate by the same percentage points

Question

Quizplus · Accepted Answer

An increase in the inflation rate while holding the nominal interest rate constant will decrease the real interest rate. This is because the real interest rate is calculated as the nominal interest rate minus the inflation rate, so an increase in the inflation rate will lead to a decrease in the real interest rate. The other choices either have no effect on the real interest rate (A) or result in an increase in the real interest rate (B and D).

Which of the Following Decreases the Real Interest Rate