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

Question

Quizplus · Accepted Answer

When expected inflation is constant, the real interest rate is calculated as the nominal interest rate minus the expected inflation rate. Therefore, when the nominal interest rate increases, the real interest rate will increase by the same amount, as the expected inflation rate is constant. Hence, the correct answer is B.

If Expected Inflation Is Constant, Then When the Nominal Interest