Lower inflation boosts real interest rates for savers

Steps:

• Nominal interest rate is fixed at 4%.
• Initial real interest rate: 4% - 5% inflation = -1% (savers lose purchasing power).
• New real interest rate: 4% - 3% inflation = +1% (savers now gain purchasing power).
• Thus, savers benefit in real terms from the positive real return.

Why C is correct:

• Real interest rate = nominal rate - inflation rate; falling inflation raises the real rate, increasing savers' real returns on deposits.

Why the others are wrong:

• A: Menu costs (costs of changing prices) decrease with lower inflation but do not fall to zero.
• B: Fixed-income recipients face less erosion of purchasing power but are not "better off" relative to savers who gain from positive real rates.
• D: Currency's purchasing power rises with any lower inflation, but the question highlights the interest rate's role in savers' gains.

Final answer: C