Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Real interest rates decrease
B
Real interest rates increase
C
Real interest rates remain unchanged
D
Real interest rates become negative
Understanding the Answer
Let's break down why this is correct
Answer
When inflation rises and nominal interest rates stay the same, real interest rates will decrease. Real interest rates are the rates you actually earn on your money after considering inflation. For example, if the nominal interest rate on your savings is 5% but inflation rises to 3%, the real interest rate is only 2%. This means that even though you are earning interest, the purchasing power of your money is not growing as much because prices are increasing faster. Therefore, higher inflation with unchanged nominal rates reduces the real value of interest earnings.
Detailed Explanation
When inflation goes up, the money you earn loses value faster. Other options are incorrect because Some might think that if inflation rises, interest rates must also rise; It's a common mistake to think that real rates don't change with inflation.
Key Concepts
Real Interest Rates
Inflation
Nominal Interest Rates
Topic
Real Interest Rates and Inflation
Difficulty
easy level question
Cognitive Level
understand
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