If the inflation rate is larger than the nominal interest rate:
A) unemployment rises.
B) the real interest rate is zero.
C) the real interest rate is negative.
D) the real interest rate is larger than the nominal interest rate.
E) Not enough information is given.

Question

Quizplus · Accepted Answer

The real interest rate equals the nominal interest rate minus the inflation rate. If the inflation rate is higher than the nominal interest rate, the real interest rate will be negative. This means that the interest rate earned on an investment is lower than the rate of inflation, causing a decrease in the purchasing power of the investment.

If the Inflation Rate Is Larger Than the Nominal Interest