Question

1.7 If the real interest rate is negative, then:
a) the inflation rate is larger than the nominal interest rate.
b) the inflation rate is smaller than the real interest rate.
c) the inflation rate is smaller than the nominal interest rate.
d) lenders will gain.
e) the real value of a loan will increase.

Answer 1

1.7

Correct Answer:

A.

Working note:

Real interest rate = nominal interest rate - inflation rate

If inflation rate is bigger than the nominal rate of interest, then real interest rate will become negative.

For example, if inflation rate is 5%, nominal rate is 4%,

Then, real interest rate = 4%-5% = -1%