Suppose that the nominal interest rate is constant and the average price level begins to rise. Which of the following is most likely to happen?
A) The real interest rate will fall.
B) The level of national output will fall.
C) The real interest rate will increase.
D) The unemployment rate will increase.

Question

Quizplus · Accepted Answer

When the average price level rises (indicating inflation), the real interest rate, which is the nominal interest rate adjusted for inflation, will fall if the nominal interest rate remains constant. This is because the purchasing power of the interest earned decreases as prices rise.

Suppose That the Nominal Interest Rate Is Constant and the Average