In which case below is the real interest rate the highest?
A)the nominal interest rate = 1% and inflation = 3%
B)the nominal interest rate = 6% and inflation = 4%
C)the nominal interest rate = 2% and inflation = -1%
D)the nominal interest rate = 2% and inflation = 1%

Question

Quizplus · Accepted Answer

In option C, the nominal interest rate is 2% and inflation is negative, which means the real interest rate is the nominal interest rate plus inflation, i.e., 2% + (-1%) = 1%. This is the highest among all the options presented. In options A and D, inflation is higher than the nominal interest rate, resulting in negative real interest rates. In option B, though the nominal interest rate is higher, inflation is also higher, resulting in a lower real interest rate than option C.

In Which Case Below Is the Real Interest Rate the Highest