Say that initially the nominal interest rate is 6 and prices are stable, but the inflation rate the following year rises to 3. If the real rate of interest is to remain unchanged, the nominal interest rate in the second year must:
a. rise by 9 percentage points.
b. rise by 6 percentage points.
c. rise by 3 percentage points.
d. remain unchanged.
Question 2
What would happen to the real interest rate if originally the nominal interest rate was 14 and the inflation rate was 10, then the nominal interest rate fell to 7 as the inflation rate fell to 4? It would go from:
a. 24 to 11.
b. 11 to 24.
c. 4 to 3.
d. 3 to 4.
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