The correct answer is: C. no inflation
The real risk-free rate is the rate of return on an investment that is free of inflation risk. It is calculated by subtracting the expected rate of inflation from the nominal risk-free rate.
The nominal risk-free rate is the rate of return on an investment that is free of default risk. It is typically represented by the yield on a government bond.
The expected rate of inflation is the rate of increase in prices that is expected to occur over a given period of time. It is typically measured by the Consumer Price Index (CPI).
When there is no inflation, the real risk-free rate is equal to the nominal risk-free rate. This is because there is no risk of the purchasing power of the investment being eroded by inflation.
When there is high inflation, the real risk-free rate will be lower than the nominal risk-free rate. This is because the purchasing power of the investment will be eroded by inflation, so investors will demand a higher return to compensate for this risk.
When there is low inflation, the real risk-free rate will be higher than the nominal risk-free rate. This is because the purchasing power of the investment will be relatively stable, so investors will be willing to accept a lower return.