According to the inflation-caused wealth effect, people will borrow and lend the same amount of funds at any expected real interest rate, regardless of the expected inflation rate.

Question

Quizplus · Accepted Answer

The inflation-caused wealth effect suggests that if people expect higher inflation, they might feel poorer in real terms and therefore might be less inclined to borrow, while lenders might demand higher nominal interest rates to compensate for the expected loss in purchasing power, affecting the amounts borrowed and lent at any given real interest rate.

According to the Inflation-Caused Wealth Effect, People Will Borrow and Lend