An economy transitions from an annual inflation rate of +2% to a deflation rate of -3%. Over this same period, the central bank keeps the nominal interest rate constant at 1%.
Which of the following correctly describes the resulting change in the real interest rate and the redistribution of real wealth in the economy?
The real interest rate increases from −1%-1\%−1% to +4%+4\%+4%, and real wealth is redistributed from debtors to creditors.
The real interest rate increases from −1%-1\%−1% to +4%+4\%+4%, and real wealth is redistributed from creditors to debtors.
The real interest rate decreases from +1%+1\%+1% to −4%-4\%−4%, and real wealth is redistributed from debtors to creditors.
The real interest rate decreases from −1%-1\%−1% to −2%-2\%−2%, and real wealth is redistributed from creditors to debtors.
