For a given nominal interest rate, an increase in the inflation rate will cause real interest rates to:
A) remain relatively constant.
B) increase.
C) decrease.
D) become unpredictable.

Question

Quizplus · Accepted Answer

An increase in inflation will cause the real interest rate to decrease because the purchasing power of the money lent or deposited will be reduced due to the higher price level. Therefore, lenders and investors will demand higher nominal interest rates to compensate for the decrease in the real value of the money. Conversely, borrowers will benefit from lower real interest rates since they will repay their loans with money that has lost some of its value due to inflation.

For a Given Nominal Interest Rate, an Increase in the Inflation