Which of the following is TRUE concerning interest rates?

Question

The nominal interest rate can be negative.

The real interest rate cannot be negative.

The real interest rate can only be positive.

The real interest rate can be zero, positive, or negative.

Answer 1

The real interest rate can be zero, positive, or negative.

Answer 2

The correct answer is:

The real interest rate can be zero, positive, or negative.

[ The reason is that the real interest (r) is defined as the difference between the nominal interest rate (i) and the inflation rate(p). So, if i=p, r=i-p=0. If i>p, r=i-p>0 and if i<p, r=i-p<0. The nominal interest cannot be negative as it would be a perverse situation where by borrowing money as loan one will recieve interest from the lender instead of the borrower paying interest to the lender.].