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.
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.