Suppose you are told that the nominal interest rate is greater than the real interest rate. Given this information, we would be able to conclude that:
A) expected inflation must be positive.
B) either the nominal or real interest rate must be negative.
C) expected inflation must be negative.
D) deflation must be occurring.
E) both the nominal and real interest rates must be negative.

Question

Quizplus · Accepted Answer

If the nominal interest rate is greater than the real interest rate, this means that inflation must be positive. The nominal interest rate is the actual interest rate that is charged by lenders and paid by borrowers, while the real interest rate takes into account the impact of inflation on purchasing power. Therefore, if the nominal interest rate is greater than the real interest rate, this means that inflation is reducing the real value of the money borrowed or invested, and thus expected inflation must be positive.

Suppose You Are Told That the Nominal Interest Rate Is