If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate? (A) 7 percent (B) 5 percent (C) 3 percent (D) 3/5 percent

Answer: Option (A) is correct.

Explanation:

Given that,

Nominal interest rate = 5%

Deflation rate = 2 %

Real interest rate = Nominal interest rate + Deflation rate

= 5% + 2 %

= 7%

If a country is experiencing a deflation then the real interest rate is greater than the nominal interest rate.