When deflation exists,
A)the real interest rate is less than the nominal interest rate.
B)the real interest rate is greater than the nominal interest rate.
C)the real interest rate and inflation are less than the nominal interest rate.
D)prices rise.

Question

Quizplus · Accepted Answer

When deflation exists, the general price level is decreasing, resulting in a greater purchasing power of money. Therefore, the real interest rate, which takes into account inflation or deflation, is higher than the nominal interest rate, which only considers the stated interest rate.

When Deflation Exists