If a country had deflation of 3 percent while the nominal interest rate increased by 1 percentage point, how would the real interest rate change?
A) The real interest rate would decrease by 2 percentage point.
B) The real interest rate would increase by 2 percentage point.
C) The real interest rate would decrease by 4 percentage points.
D) The real interest rate would increase by 4 percentage points.

Question

Quizplus · Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. With deflation of 3% (which is negative inflation), the real interest rate increases by 3%. If the nominal rate increases by 1%, the real rate increases by a total of 4%.

If a Country Had Deflation of 3 Percent While the Nominal