A former Governor of the Bank of Canada argued that high interest rates tend to accompany high inflation because inflation
A)reduces banks' profits who then respond by lowering their lending rates.
B)erodes the value of the dollar and therefore lenders need to be compensated through higher interest rates.
C)causes the Canadian dollar to appreciate which again fuels inflation even more.
D)lowers short term interest rates and acts as an incentive to borrow money.
E)increases housing prices so younger Canadians are made worse off.

Question

Quizplus · Accepted Answer

High inflation erodes the purchasing power of a currency, causing lenders to demand higher interest rates to compensate for the reduced value of the money they will be repaid in.

A Former Governor of the Bank of Canada Argued That