If a country had deflation, how would the nominal interest rate compare to the real interest rate?
A)The nominal interest rate would be greater than the real interest rate.
B)The real interest rate would be greater than the nominal interest rate.
C)The real interest rate would equal the nominal interest rate.
D)There is insufficient information to answer the question.

Question

Quizplus · Accepted Answer

In a situation of deflation where the general price level is decreasing, the real interest rate will be higher than the nominal interest rate because the inflation component of the nominal interest rate will be negative. Thus, the real interest rate, which is the nominal rate minus inflation, will be higher than the nominal rate.

If a Country Had Deflation, How Would the Nominal Interest