What would happen to the real interest rate if originally the nominal interest rate was 14% and the inflation rate was 10%, then the nominal interest rate fell to 7% as the inflation rate fell to 4%? It would go from:
A)24% to 11%.
B)11% to 24%.
C)4% to 3%.
D)3% to 4%.

Question

What would happen to the real interest rate if originally the nominal interest rate was 14% and the inflation rate was 10%, then the nominal interest rate fell to 7% as the inflation rate fell to 4%? It would go from:
A)​24% to 11%.
B)​11% to 24%.
C)​4% to 3%.
D)3% to 4%.

Quizplus · Accepted Answer

The real interest rate can be approximated by subtracting the inflation rate from the nominal interest rate. Initially, it's 14% - 10% = 4%. After the change, it's 7% - 4% = 3%.

What Would Happen to the Real Interest Rate If Originally