Initially, the nominal rate of interest is 8 percent and inflation is 4 percent. The nominal interest rate then rises to 12 percent and the inflation rate to 8 percent. It follows that the real rate of interest has
A) fallen.
B) remained the same.
C) risen to 8 percent.
D) risen to 10 percent.

Question

Quizplus · Accepted Answer

The real rate of interest is calculated by subtracting the inflation rate from the nominal interest rate. Initially, it is 8% - 4% = 4%. After the change, it is 12% - 8% = 4%. Therefore, the real rate of interest has remained the same.

Initially, the Nominal Rate of Interest Is 8 Percent and Inflation