If an economy experiences deflation,the real interest rate
A)will be less than the nominal interest rate.
B)will be negative when the nominal interest rate is positive.
C)will be greater than the nominal interest rate.
D)will be equal to the deflation rate,so long as the nominal interest rate is positive.

Question

Quizplus · Accepted Answer

Deflation means the general level of prices is falling. When this happens, the purchasing power of money increases over time. The real interest rate adjusts the nominal interest rate for the effect of inflation (or deflation). In a deflationary environment, because the value of money is increasing, the real interest rate (which reflects the true cost of borrowing when adjusted for changes in purchasing power) will be higher than the nominal interest rate (the stated rate without adjustment for inflation/deflation).

If an Economy Experiences Deflation,the Real Interest Rate