If expected inflation is constant and the nominal interest rate increases by 4 percentage points, then the real interest rate
A)decreases by 4 percentage points.
B)decreases, but by more than 4 percentage points.
C)increases, but by more than 4 percentage points.
D)increases by 4 percentage points.

Question

Quizplus · Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. If expected inflation is constant and the nominal interest rate increases by 4 percentage points, the increase in the nominal rate directly translates to an increase in the real interest rate by the same amount, since the inflation rate has not changed.

If Expected Inflation Is Constant and the Nominal Interest Rate