If expected inflation is constant and the nominal interest rate increases by 2 percentage points,then the real interest rate
A) increases by 2 percentage points.
B) increases,but by less than 2 percentage points.
C) decreases,but by less than 2 percentage points.
D) decreases by 2 percentage points.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the expected inflation rate. If expected inflation is constant and the nominal interest rate increases by 2 percentage points, the real interest rate also increases by 2 percentage points.

If Expected Inflation Is Constant and the Nominal Interest Rate