Question

Which of the following events results in a decrease in the real interest rate? a. Inflation rises, while interest paid by banks drops. b. The nominal interest rate and the inflation rate drop by the same number of percentage points. c. Inflation increases, while the nominal interest remains the same. d. Interest paid by banks goes up, while inflation remains the same.

Answer 1

The correct answer is option c.

Step-by-step explanation:

The real interest rate is the inflation adjusted interest rate. It shows the real rate by which the value of investment or saving is increasing.

It can be calculated by deducting the rate of inflation from the nominal interest rate.

When the nominal interest rate remains the same but the inflation increases, it will cause the real interest rate to decline.