If expected inflation is constant and the nominal interest rate increased 5 percentage points, what would happen to the real interest rate?
A)It would increase 5 percentage points.
B)It would increase, but by less than 5 percentage points.
C)It would decrease, but by less than 5 percentage points.
D)It would decrease by 5 percentage points.

Question

Quizplus · Accepted Answer

If expected inflation is constant, any change in the nominal interest rate directly translates to the same change in the real interest rate. Therefore, a 5 percentage point increase in the nominal interest rate would result in a 5 percentage point increase in the real interest rate.

If Expected Inflation Is Constant and the Nominal Interest Rate