When the real rate of interest is less than the nominal rate of interest, then:
A)Inflation must be added to the nominal rate
B)Investment returns do not increase purchasing power
C)Nominal flows should be discounted with real rates
D)Inflation is expected to occur

Question

Quizplus · Accepted Answer

When the real rate of interest is less than the nominal rate of interest, it indicates that inflation is expected to occur. This is because the nominal rate includes both the real rate of interest and the expected inflation rate. Therefore, if the nominal rate is greater than the real rate, it implies that the expected inflation rate is positive.

When the Real Rate of Interest Is Less Than the Nominal