If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:
A)increase by 2
B)percent increase by 1 percent.
C)remain constant.
D)decrease by 1 percent.

Question

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:
A)increase by 2
B)percent  increase by 1 percent.
C)remain constant.
D)decrease by 1 percent.

Quizplus · Accepted Answer

The nominal interest rate can be calculated as the sum of the real interest rate and the inflation rate. Therefore, if the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must increase by 1 percent (i.e. 2% - 1% = 1%).

If the Real Interest Rate Declines by 1 Percent and the Inflation