Periods of price deflation,such as the Great Depression,are characterized by
A)low nominal rates but high real rates of interest.
B)low nominal and real interest rates.
C)real rates of interest lower than the nominal rate of interest.
D)high nominal and real rates of interest.

Question

Quizplus · Accepted Answer

During periods of price deflation, the general price level is falling which means that the purchasing power of money is increasing. As a result, the real interest rate (nominal rate minus inflation) tends to be higher than the nominal interest rate. This can lead to low nominal rates but high real rates of interest. The Great Depression was a period of price deflation and had low nominal rates but high real rates of interest.

Periods of Price Deflation,such as the Great Depression,are Characterized by