When there is deflation,
A)the real interest rate rises.
B)it has no effect on the output gap.
C)it has no effect on the unemployment rate.
D)there is decline in real money.
E)nominal interest rates are negative.

Question

Quizplus · Accepted Answer

Deflation leads to an increase in the real interest rate because the nominal interest rate remains constant, but the purchasing power of money increases. This leads to a higher cost of borrowing, which results in a decrease in investment and consumption, further reducing the demand for goods and services and adding to deflationary pressures.

When There Is Deflation