If the nominal interest rate remains the same but inflation rises, what happens to the real interest rate?

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Multiple Choice

If the nominal interest rate remains the same but inflation rises, what happens to the real interest rate?

Explanation:
Real interest rates reflect what you actually earn after inflation, so they’re roughly the nominal rate minus the inflation rate. If the nominal rate stays the same but inflation climbs, the real rate falls. For example, with a fixed nominal rate of 5%, inflation at 2% gives about a 3% real rate; if inflation rises to 4%, the real rate drops to about 1%. It only becomes negative if inflation exceeds the nominal rate. So the real rate decreases.

Real interest rates reflect what you actually earn after inflation, so they’re roughly the nominal rate minus the inflation rate. If the nominal rate stays the same but inflation climbs, the real rate falls. For example, with a fixed nominal rate of 5%, inflation at 2% gives about a 3% real rate; if inflation rises to 4%, the real rate drops to about 1%. It only becomes negative if inflation exceeds the nominal rate. So the real rate decreases.

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