Final answer:
The correct statement is C.
Nominal and real interest rates do not always move together, as real interest rates are adjusted for inflation, which can vary independently of nominal rates. Changes in inflation and deflation can cause these rates to diverge, and tax treatments of interest can also affect their relationship.
Step-by-step explanation:
The correct statement is C. Nominal and real interest rates do not always move together. The nominal interest rate is the rate quoted by financial institutions, while the real interest rate is the nominal rate adjusted for the rate of inflation. For example, if the nominal interest rate is 7% and inflation is 3%, the real interest rate is 4%. In contrast, if there is deflation of 2%, the real interest rate would increase to 9%. This dynamic shows that changes in inflation can cause nominal and real interest rates to move differently.
Moreover, taxes can complicate the relationship between nominal and real interest rates, as they are often levied on the nominal rate without consideration for inflation. During periods of high inflation, this can result in a discrepancy between the real gain for an investor and the tax obligations on nominal earnings. Therefore, it is essential for individuals and institutions to pay careful attention to both rates, comprehending their implications on loans, investments, and economic stability.