If expected inflation is constant, then when the nominal interest rate falls, the real interest rate
A) falls by more than the change in the nominal interest rate.
B) falls by the change in the nominal interest rate.
C) rises by the change in the nominal interest rate.
D) rises by more than the change in the nominal interest rate.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate. If the expected inflation rate is constant, then when the nominal interest rate falls, the real interest rate will also fall by the same amount. This is because the decrease in the nominal interest rate is not offset by any change in the expected inflation rate. Therefore, the real interest rate will only change by the amount of the change in the nominal interest rate.

If Expected Inflation Is Constant, Then When the Nominal Interest