Suppose government officials report that the expected inflation rate is negative. Given this information, you would be able to conclude that:
A) the real interest rate is greater than zero.
B) the real interest rate is less than the nominal interest rate.
C) the real interest rate can be any of the above, depending on the absolute value of the negative expected inflation rate.
D) the real interest rate is negative.
E) the real interest rate is equal to the nominal interest rate.

Question

Quizplus · Accepted Answer

If the expected inflation rate is negative, it means that the overall price level is expected to decrease. This can result in a situation where the real interest rate (nominal interest rate - expected inflation) is greater than zero. This is because lenders would likely demand a positive return on their loans even in an environment with deflation.

Suppose Government Officials Report That the Expected Inflation Rate Is