Which of the following would cause the real interest rate to be negative?
A) When the nominal interest rate is greater than the inflation rate
B) When the nominal interest rate is greater than the rate of deflation
C) When the nominal interest rate is smaller than the rate of deflation
D) When the nominal interest rate is smaller than the inflation rate
E) When the nominal interest rate is equal to the inflation rate

Question

Quizplus · Accepted Answer

When the nominal interest rate is smaller than the inflation rate, the real interest rate is negative. For example, if the nominal interest rate is 2% and the inflation rate is 3%, then the real interest rate is -1% (2% - 3% = -1%). This means that the value of money is decreasing over time, even though the nominal interest rate appears to be positive.

Which of the Following Would Cause the Real Interest Rate