An increase in the expected rate of inflation causes
A) a decrease in the demand for loanable funds.
B) an increase in the supply of loanable funds.
C) interest rates to rise.
D) interest rates to fall.

Question

Quizplus · Accepted Answer

An increase in expected inflation leads to an increase in interest rates to compensate for the expected decrease in purchasing power of money. This is why when people expect inflation, they demand higher interest rates. Thus, option C is correct. Option A is incorrect because an increase in interest rates leads to a decrease in the demand for loanable funds. Option B is incorrect because an increase in expected inflation does not affect the supply of loanable funds. Option D is incorrect because an increase in expected inflation leads to an increase in interest rates, not a decrease.

An Increase in the Expected Rate of Inflation Causes