If a country experienced deflation,then
A)the nominal interest rate would be greater than the real interest rate.
B)the real interest rate would be greater than the nominal interest rate.
C)the real interest rate would equal the nominal interest rate.
D)nominal GDP would be smaller than the money supply.

Question

Quizplus · Accepted Answer

Deflation is a period of falling prices, which means that the value of money increases over time. In such a scenario, the real interest rate would be higher than the nominal interest rate. This is because the nominal interest rate reflects the inflation rate and if there is deflation, the inflation rate is negative. Therefore, the real interest rate (nominal interest rate minus inflation rate) would be higher than the nominal interest rate.  Option A is incorrect because in deflation, the nominal interest rate would be lower due to the negative inflation rate. Option C is incorrect because in deflation, the real interest rate is higher than the nominal interest rate. Option D is incorrect because nominal GDP is based on the prices of goods and services and in deflation, prices are falling, which would result in a lower nominal GDP.

If a Country Experienced Deflation,then