People know that the inflation rate will increase from 3 percent to 5 percent. As a result
A) the nominal interest rate falls by 2 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate rises by 2 percentage points.
D) the real interest rate rises by 2 percentage points.

Question

Quizplus · Accepted Answer

When people expect inflation to increase, lenders demand higher nominal interest rates to compensate for the decreased purchasing power of money in the future, leading to an increase in the nominal interest rate.

People Know That the Inflation Rate Will Increase from 3