People know that the inflation rate will decrease from 7 percent to 3 percent. As a result
A) the nominal interest rate rises by 4 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate falls by 4 percentage points.
D) the nominal interest rate equals 3 percent.

Question

Quizplus · Accepted Answer

When the inflation rate decreases, the nominal interest rate typically falls by the same amount to maintain the real interest rate, assuming the real interest rate remains constant.

People Know That the Inflation Rate Will Decrease from 7