Final answer:
The relationship between Nominal Discount Rate and Real Discount Rate depends on the inflation rate. Nominal rate minus inflation gives the real rate. Deflation can unexpectedly increase the real interest, causing economic downturns.
Step-by-step explanation:
The relationship between the Nominal Discount Rate (ND) and the Real Discount Rate (RD) is D) The relationship depends on the inflation rate. The real discount rate is calculated as the nominal discount rate minus the rate of inflation. For instance, if the nominal interest rate is 7% and the rate of inflation is 3%, then the real interest rate would effectively be 4%. Conversely, if we consider a scenario with deflation, say a nominal interest rate of 7% and a deflation of 2%, then the real interest rate would be 9%. Deflation can increase the real cost of borrowing and potentially lead to a recession by causing a decrease in aggregate demand as banks, experiencing losses, become less inclined to issue new loans.