The money interest rate may be a misleading indicator of real borrowing costs when
A) the unemployment rate is high.
B) the actual rate of unemployment exceeds the natural rate of unemployment.
C) the inflation rate is high.
D) real output is declining.

Question

Quizplus · Accepted Answer

When the inflation rate is high, the money interest rate may not accurately reflect the real borrowing costs because inflation erodes the purchasing power of money over time. Therefore, borrowers may still face high real borrowing costs even if the nominal interest rate appears low.

The Money Interest Rate May Be a Misleading Indicator of Real