During periods of deflation, the nominal interest rate will be
A)higher than the real interest rate.
B)lower than the real interest rate.
C)the same as the real interest rate.
D)possibly higher, lower, or the same as the real interest rate.The answer depends on how much deflation there is in the economy.

Question

During periods of deflation, the nominal interest rate will be​
A)​higher than the real interest rate.
B)​lower than the real interest rate.
C)​the same as the real interest rate.
D)​possibly higher, lower, or the same as the real interest rate.The answer depends on how much deflation there is in the economy.

Quizplus · Accepted Answer

During periods of deflation, the real interest rate is calculated by adjusting the nominal interest rate for the rate of deflation. Since deflation means prices are falling, the purchasing power of money increases. Therefore, the real interest rate, which reflects the true cost of borrowing after adjusting for inflation or deflation, will be higher than the nominal rate, which does not account for changes in price levels.

During Periods of Deflation, the Nominal Interest Rate Will Be​

During Periods of Deflation, the Nominal Interest Rate Will Be