For a given real interest rate, which statement best describes the effects of an increase in inflation?
A) Inflation makes the real interest rate decrease, which encourages savings.
B) Inflation makes the real interest rate decrease, which discourages savings.
C) Inflation makes the real interest rate increase, which encourages savings.
D) Inflation makes the real interest rate increase, which discourages savings.

Question

Quizplus · Accepted Answer

An increase in inflation causes the real interest rate to decrease, as the nominal interest rate does not necessarily rise by the same amount as inflation. This means that people are discouraged from saving, as their savings will not earn as much in real terms. Therefore, choice B is the correct statement.

For a Given Real Interest Rate, Which Statement Best Describes