If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.
A)increase
B)decrease
C)have an effect, which cannot be determined with above information, on
D)have no effect on

Question

Quizplus · Accepted Answer

If inflation and nominal interest rates move more closely together, it implies that changes in inflation are more closely matched by changes in nominal interest rates. This would stabilize the real interest rate (nominal interest rate minus inflation), thus decreasing its volatility over time.

If Inflation and Nominal Interest Rates Move More Closely Together