If the nominal interest rate is a constant 15 percent and anticipated inflation falls from 10 percent to 7 percent,the real interest rate would change from
A)15 to 10 percent.
B)5 to 8 percent.
C)7 to 9 percent.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the anticipated inflation rate from the nominal interest rate. Therefore, the initial real interest rate would be 15 - 10 = 5 percent. After the anticipated inflation falls to 7 percent, the new real interest rate would be 15 - 7 = 8 percent. Therefore, the real interest rate would change from 5 to 8 percent.

If the Nominal Interest Rate Is a Constant 15 Percent