Which of the following is the most accurate statement about nominal and real interest rates?
A) Nominal and real interest rates always move together.
B) Nominal and real interest rates never move together.
C) Nominal and real interest rates often do not move together.
D) Nominal and real interest rates always move in opposite directions.

Question

Quizplus · Accepted Answer

Nominal and real interest rates often do not move together. Nominal interest rates reflect the rate at which the amount of money invested in an asset will grow over time, whereas real interest rates take into account the effect of inflation on the purchasing power of the money invested. Therefore, changes in inflation can cause nominal and real interest rates to move in opposite directions. For example, if inflation falls, a lender may reduce the nominal interest rate but keep the real interest rate the same, meaning borrowers effectively pay less interest. Conversely, if inflation rises, a lender may increase the nominal interest rate, but keep the real interest rate the same, meaning borrowers effectively pay more interest.

Which of the Following Is the Most Accurate Statement About