For a given real interest rate,a decrease in the inflation rate would
A)decrease the after-tax real interest rate and so decrease saving.
B)decrease the after-tax real interest rate and so increase saving.
C)increase the after-tax real interest rate and so decrease saving.
D)increase the after-tax real interest rate and so increase saving.

Question

Quizplus · Accepted Answer

A decrease in the inflation rate would lead to an increase in the purchasing power of money. This would result in an increase in the after-tax real interest rate. So, people would be inclined to save more as they would earn higher returns on their savings. Therefore, an increase in the after-tax real interest rate would increase saving, making option D the correct choice.

For a Given Real Interest Rate,a Decrease in the Inflation