Which of the following statements is correct? rev: 06_06_2018 Multiple Choice For a given real interest rate, the nominal interest must decrease if expected inflation increases. For a given nominal interest rate, the real interest will decrease if inflation decreases. For a given expected inflation rate, the nominal interest must increase if real interest decreases. For a given real interest rate, the nominal interest must increase if expected inflation increases.

For a given real interest rate, the nominal interest must increase if expected inflation increases.

Explanation:

As per Fisher, The real interest rate is the rate of interest which is arrived at after considering the effect of inflation.

Nominal rate of interest on the other hand is rate of interest which does not consider the effect of inflation.

Real interest rate is expressed as,

= Nominal rate of interest -  Inflation

Nominal rate of interest depict the rate of return individuals earn from their deposited money. Thus, if a customer earns 8% interest on his/her deposits, this return of 8% would represent his return without considering the purchasing power which is depicted by real rate of interest.

Thus, at a given rate of real interest, if expected inflation increases, this increase should be corresponded by a proportionate increase in the nominal rate of interest such as bank rate of interest, so as the real rate of interest remains the same and purchasing power of an individual remains at the same level as before.

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answer; standing committee;