When there is positive inflation
A) the nominal interest rate is approximately equal to the real interest rate.
B) the real interest rate is greater than the nominal interest rate.
C) the nominal interest rate is greater than the real interest rate.
D) the real interest rate is negative.

Question

Quizplus · Accepted Answer

When there is positive inflation, the prices of goods and services rise over time. If the nominal interest rate (the rate at which money grows on a deposit) does not adjust to inflation, the real value of the money invested decreases. Therefore, to account for inflation, lenders charge a higher nominal interest rate. As a result, the nominal interest rate is greater than the real interest rate.

When There Is Positive Inflation