For a given real interest rate, which of the following best describes the effects of an increase in inflation?
A)Inflation makes the real interest rate decrease, which encourages savings.
B)Inflation makes the real interest rate decrease, which discourages savings.
C)Inflation makes the real interest rate increase, which encourages savings.
D)Inflation makes the real interest rate increase, which discourages savings.

Question

Quizplus · Accepted Answer

An increase in inflation causes the real interest rate to decrease because the nominal interest rate (the stated interest rate) typically does not adjust immediately to changes in inflation. This means that the return on savings is not keeping up with the rate of inflation, which in turn discourages savings.

For a Given Real Interest Rate, Which of the Following