Final answer:
When the inflation rate is zero, the nominal interest rate equals the real interest rate because there is no change in purchasing power that needs to be accounted for in the real interest rate calculation.
Step-by-step explanation:
If the expected inflation rate decreases to zero, the nominal interest rate will be equal to the real interest rate. This is because the real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. So, with an inflation rate of zero, there is no difference to account for, making the real interest rate the same as the nominal interest rate.
For example, if the nominal interest rate is 7% and the inflation rate is 0%, then the real interest rate is also 7%. Unlike scenarios with positive inflation or deflation (negative inflation), where the real interest rate would be adjusted accordingly. In deflationary periods, the real interest rate increases as money gains purchasing power, whereas in inflationary periods, the real interest rate decreases as money loses purchasing power.