There is a persistent fear that there will be a high level of deflation. Many economists warn that it may be worse for the economy than if there is high inflation. Suppose that Herb is in debt and has to pay a 5.25% nominal interest rate. He expected inflation to be 1.50%. Instead, inflation is −2.00% (deflation). Multiple Choice Question... Because the economy is experiencing deflation of −2.00%instead of inflation of 1.50%, Herb's real interest rate, compared to what he expected to pay, has A) decreased, so Herb feels poorer. B) increased, so Herb feels richer. C) decreased, so Herb feels richer. D) increased, so Herb feels poorer
There is a persistent fear that there will be a high level of deflation. Many economists warn that it may be worse for the economy than if there is high inflation. Suppose that Herb is in debt and has to pay a 5.25% nominal interest rate. He expected inflation to be 1.50%. Instead, inflation is −2.00% (deflation). Multiple Choice Question... Because the economy is experiencing deflation of −2.00%instead of inflation of 1.50%, Herb's real interest rate, compared to what he expected to pay, has A) decreased, so Herb feels poorer. B) increased, so Herb feels richer. C) decreased, so Herb feels richer. D) increased, so Herb feels poorer
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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There is a persistent fear that there will be a high level of deflation. Many economists warn that it may be worse for the economy than if there is high inflation. Suppose that Herb is in debt and has to pay a 5.25% nominal interest rate. He expected inflation to be 1.50%. Instead, inflation is −2.00% (deflation).
Multiple Choice Question...
Because the economy is experiencing deflation of −2.00%instead of inflation of 1.50%, Herb's real interest rate, compared to what he expected to pay, has
A) decreased, so Herb feels poorer.
B) increased, so Herb feels richer.
C) decreased, so Herb feels richer.
D) increased, so Herb feels poorer.
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