Final answer:
In an all-currency economy with fixed real output and real interest rate, the inflation rate equals the rate of money growth. This is based on the quantity theory of money which links money supply growth directly to inflation. option c.
Step-by-step explanation:
In an all-currency economy where real output and the real interest rate are fixed and the money growth and inflation rates are constant, the inflation rate equals the rate of money growth. The premise of this scenario follows the quantity theory of money, which suggests that in the long run, inflation is determined by the growth rate of money in the economy. Since real output and the real interest rate are fixed, changes in the money supply will directly translate to proportional changes in the price level, or inflation. This concept demonstrates one of the key principles of monetary economics that ties the money supply to the inflation rate.
Moreover, understanding the relationship between nominal and real interest rates is crucial. The real interest rate is the nominal interest rate minus the rate of inflation. Therefore, if there is deflation (a negative rate of inflation), the real interest rate would actually increase, potentially leading to reduced borrowing, a decline in aggregate demand, and possibly a recession.