Question

Which of these statements about interest rates and inflation is true?a. The real interest rate is equal to the nominal interest rate plus the inflation rate. b. The real interest rate is equal to the nominal interest rate divided by the inflation rate. c. If there is zero inflation, the nominal interest rate is equal to the real interest rate.d. I don't know yetSubmit

Answer 1

Answer:

Option C If there is zero inflation, the nominal interest rate is equal to the real interest rate

Explanation:

The reason is that, according to Fisher Formula:

(1+n) = (1+r)*(1+i)

And here

r is real rate

i is inflation

n is nominal rate

When i is zero, then

(1+n) = (1+r)*(1+0)

(1+n) = (1+r)

1+n = 1+ r

n= 1 + r - 1

n=r

Hence the statement C is right that when inflation is zero then the nominal interest is equal to real rate.