Question

If the inflation rate is zero, then

A.) both the nominal interest rate and the real interest rate can fall below zero.

B.) the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero.

C.) the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero.

D.) neither the nominal interest rate nor the real interest rate can fall below zero.

Answer 1

Answer: D.  neither the nominal interest rate nor the real interest rate can fall below zero.

If the inflation rate is 0, this shows the price levels are constant and there are no changes in price from one year to another. In this case, the interest rates will be constant and it neither affects the borrower or lender.

In this case, the real interest rate will not fall below zero because when the inflation is adjusted with the interest rate, the real interest rate falls below 0.

And also, the real interest rate and nominal interest rate will be the same if it is for the short term borrowing. So, even nominal interest rate will not fall below zero.