The real interest rate must be
A)negative if the nominal rate of interest is greater than the rate of inflation.
B)low if the nominal interest rate is high.
C)positive if the nominal rate of interest is greater than the rate of inflation.
D)high if the inflation rate is greater than the nominal interest rate.
E)high if the nominal interest rate is high.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the rate of inflation from the nominal interest rate. Therefore, if the nominal rate of interest is greater than the rate of inflation, the real interest rate will be positive. A negative real interest rate occurs when the nominal interest rate is less than the rate of inflation. Therefore, choice A is incorrect. The level of the nominal interest rate does not necessarily determine the level of the real interest rate, so choice B is also incorrect. The inflation rate being greater than the nominal interest rate would result in a negative real interest rate and not a high real interest rate, so choice D is incorrect. Finally, choice E is incorrect because a high nominal interest rate does not necessarily indicate a high real interest rate.

The Real Interest Rate Must Be