In august, 1979, the annual rate of inflation in the u. s. was nearly 12%, and the u. s. short-term nominal interest rate was nearly 10%. over the next 35 years, both the rate of inflation and short-term nominal interest rate tended to fall. by august 2014, the rate of inflation was about 2% and the short-term nominal interest rate was close to 0%. how has the real short-term interest rate changed from 1979 to 2014? a. the real rate remained stable at minus−2%. b. the real rate declined by 10%. c. the real rate increased by 10%. d. the real rate remained stable at 2%.

Answer : a. the real rate remained stable at minus−2%.

Explanation: Nominal rate = Real rate + inflation

Real rate = nominal rate - inflation

In 1970, real rate = 10%-12% = -2%

In 2014, real rate = 0%-2% = -2%

Hence the real rate remains constant at -2% throughout

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