If prices are expected to decrease, and the nominal interest rate is close to zero,
A) the real interest rate will be less than zero.
B) the real interest rate could still be rather high.
C) the real interest rate is unaffected.
D) the real interest rate is no longer important.

Question

Quizplus · Accepted Answer

When prices are expected to decrease (deflation), the purchasing power of money increases. Even if the nominal interest rate is close to zero, the real interest rate, which adjusts the nominal rate for inflation or deflation, could be rather high because the deflation effectively increases the real return on savings.

If Prices Are Expected to Decrease, and the Nominal Interest