When deflation occurs,
A)the real interest rate is greater than the nominal interest rate.
B)the nominal interest rate is greater than the real interest rate.
C)the nominal interest rate is equal to the real interest rate and inflation is negative.
D)the nominal interest rate is equal to the real interest rate and inflation is positive.
E)the real interest rate is positive while the nominal interest rate is negative.

Question

Quizplus · Accepted Answer

Deflation implies a decrease in the general price level, which increases the real value of money. When deflation occurs, the real interest rate (which accounts for inflation) is greater than the nominal interest rate (which does not account for inflation), because the purchasing power of money increases.

When Deflation Occurs