For a given nominal interest rate, an increase in deflation will cause the real rate of interest to:
A) remain relatively constant.
B) increase.
C) decrease.
D) become unpredictable.

Question

Quizplus · Accepted Answer

An increase in deflation means prices are falling, which means that the purchasing power of money increases. Thus, the real interest rate (nominal interest rate - inflation rate) will increase.

For a Given Nominal Interest Rate, an Increase in Deflation