Suppose that in some year nominal interest rates are less than the rate of inflation. This means that
A) money demand exceeds money supply.
B) real interest rates are negative.
C) real interest rates are positive and unusually high.
D) real interest rates exceed nominal interest rates.

Question

Quizplus · Accepted Answer

When nominal interest rates are less than the rate of inflation, it means that the real interest rate (nominal interest rate minus inflation rate) is negative. This happens when inflation erodes the purchasing power of the money lent out at the nominal interest rate. As a result, borrowers benefit from lower real interest rates, while lenders lose out.

Suppose That in Some Year Nominal Interest Rates Are Less