If the real interest rate is negative, it must mean that:
A) in the short run, bond rates can be very volatile.
B) in the short run, the real interest rate equals the marginal product of capital.
C) in the short run, the real interest rate can deviate from the marginal product of capital.
D) it is difficult to predict long-term interest rates.
E) there is no relationship between long- and short-term interest rates.

Question

Quizplus · Accepted Answer

If the real interest rate is negative, it means that the nominal interest rate is less than the inflation rate, resulting in a decrease in the purchasing power of money over time. In the short run, the real interest rate can deviate from the marginal product of capital, which is the additional output produced by an additional unit of capital. In the long run, however, the real interest rate should equal the marginal product of capital to maintain equilibrium in the economy. Hence, option C is correct.

If the Real Interest Rate Is Negative, It Must Mean