If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980, while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2001, then
A)real rates were higher in 2001.
B)real rates were higher in 1980.
C)credit was more expensive in 1980.
D)credit was cheaper in 2001 because the nominal rate was lower.

Question

Quizplus · Accepted Answer

The real interest rate can be roughly calculated as the nominal interest rate minus the inflation rate. For 1980, the real interest rate is 2 percent (12% - 10%), and for 2001, it is 5 percent (7% - 2%). Therefore, real rates were higher in 2001.

If the Nominal Interest Rate Was 12 Percent and the Inflation