When expected inflation is equal to the nominal interest rate, which of the following is correct?
A) The real interest rate is higher than the nominal interest rate.
B) The real interest rate is positive.
C) The real interest rate is zero.
D) The real interest rate is negative.
E) None of the above.

Question

Quizplus · Accepted Answer

When the expected inflation rate is equal to the nominal interest rate, the real interest rate would be zero. This means that the borrowing cost and the purchasing power remains the same.

When Expected Inflation Is Equal to the Nominal Interest Rate