When looking at a graph of nominal and real interest rates you notice that nominal rates always lie above real rates.From this you conclude
A)there were serious episodes of deflation in the time frame represented on the graph.
B)consumer prices were always rising in the time frame represented on the graph.
C)the economy never experienced a recession in the time frame represented on the graph.
D)GDP was always increasing for the time frame represented on the graph.

Question

Quizplus · Accepted Answer

Nominal interest rates are the interest rates that are quoted and paid by borrowers and lenders, respectively, with no adjustment for inflation. Real interest rates, on the other hand, are adjusted for inflation. Therefore, nominal interest rates always include an inflation premium (i.e., compensation for expected inflation), which is why they are higher than real interest rates. If nominal interest rates are consistently higher than real interest rates, it implies that inflation expectations are positive, which, in turn, suggests that consumer prices were generally rising in the time frame represented on the graph. It does not necessarily imply that there were serious episodes of deflation, that the economy never experienced a recession, or that GDP was always increasing.

When Looking at a Graph of Nominal and Real Interest