When inflation is negative it:
A)raises the real interest rate.
B)increases the positive output gap.
C)has no effect on the unemployment rate.
D)increases the growth of money.
E)is called disinflation.

Question

Quizplus · Accepted Answer

When inflation is negative, the real interest rate (nominal interest rate minus inflation rate) increases. This is because the value of money is increasing in purchasing power, making it more valuable to hold onto instead of investing. This makes borrowing and lending less attractive, leading to higher real interest rates.

When Inflation Is Negative It