A decrease in the real interest rate occurs when ________.
A)there is an autonomous tightening of monetary policy
B)expected inflation increases,relative to the nominal interest rate
C)a decrease in autonomous spending causes a decrease in equilibrium output
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

An increase in expected inflation relative to the nominal interest rate leads to a decrease in the real interest rate, as the investor will receive a lower real return due to the erosion of purchasing power caused by inflation. Option A is incorrect as an autonomous tightening of monetary policy would lead to an increase in the nominal interest rate, and if inflation expectations remain unchanged, the real interest rate will increase. Option C is also incorrect as a decrease in autonomous spending would lower equilibrium output and raise the real interest rate, assuming the nominal interest rate remains unchanged. Option D is incorrect as mentioned above. Therefore, B is the correct answer.

A Decrease in the Real Interest Rate Occurs When ________