Suppose the Interest Rate Is Zero and the Public Expects

question 88

Multiple Choice

Suppose the interest rate is zero and the public expects the price level to fall by 2%. Which of the following statement is true?

• A) The value of money falls by 2%.
• B) Money becomes an interest earning asset; it earns a nominal interest rate of 2%.
• C) Money becomes an interest earning asset; it earns a real interest rate of 2%.
• D) Bonds and money will become perfect substitutes since both are non-interest earning assets.