If a country experienced deflation, then

Question

Quizplus · Accepted Answer

If a country experienced deflation, the prices of goods and services would be decreasing. This means that the purchasing power of money is increasing. As a result, lenders would demand a higher nominal interest rate to compensate for the decreasing value of money. However, the real interest rate, which takes into account inflation or deflation, would be higher than the nominal interest rate because the inflation rate is negative. Therefore, B is the correct answer.

If a Country Experienced Deflation, Then