Suppose that the nominal interest rate increases while the expected inflation rate rises.Given this information,we know with certainty that the real interest rate
A)will not change.
B)will fall.
C)will fall, but only if the increase in the nominal rate is smaller than the increase in expected inflation.
D)will fall, but only if the increase in the nominal rate is greater than the increase in expected inflation.
E) none of the above

Question

Quizplus · Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. If the increase in the nominal rate is smaller than the increase in expected inflation, the real interest rate will indeed fall, as the effect of rising inflation is greater than the effect of the rising nominal rate.

Suppose That the Nominal Interest Rate Increases While the Expected