Which of the following statements is correct?
A)If the rate of inflation is high,the nominal rate of interest must be low.
B)If the rate of inflation is less than the nominal interest rate,the real interest rate is positive.
C)If the real interest rate is less than the nominal interest rate,inflation must be zero.
D)If the real interest rate is less than the nominal interest rate,inflation must be negative.
E)If the nominal interest rate is high,the real interest rate must be high.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. If the inflation rate is less than the nominal interest rate, then the real interest rate will be positive. A) is incorrect because high inflation can lead to high nominal interest rates to compensate for the loss in purchasing power. C) is incorrect because the real interest rate can be lower than the nominal interest rate even if inflation is not zero. D) is incorrect because negative inflation is deflation, which is not necessarily linked to the difference between real and nominal interest rates. E) is incorrect because the real interest rate depends on both the nominal interest rate and inflation.

Which of the Following Statements Is Correct