Falling inflation boosts savers' real returns

Steps:

• Nominal interest rate remains 4%.
• Initial real rate: 4% - 5% inflation = -1% (savers lose in real terms).
• New real rate: 4% - 3% inflation = +1% (savers now gain in real terms).
• Lower inflation increases real returns for those earning fixed nominal interest.

Why C is correct:

• Real interest rate = nominal rate - inflation rate (Fisher equation); declining inflation raises the real rate from negative to positive, so savers gain purchasing power on savings.

Why the others are wrong:

• A: Menu costs (price adjustment expenses) decrease with lower inflation but remain positive, not zero.
• B: Fixed-income recipients face -3% real return (0% nominal - 3%), still declining in real terms though less than before.
• D: Currency's purchasing power erodes slower with lower inflation, but this applies generally, not tied to the given interest rate.

Final answer: C