A lender need not be penalized by inﬂation if the
A) long-term rate of inﬂation is less than the short-term rate of inﬂation.
B) short-term rate of inﬂation is less than the long-term rate of inﬂation.
C) lender correctly anticipates inﬂation and increases the nominal interest rate accordingly.
D) inﬂation is unanticipated by both borrower and lender.

Question

Quizplus · Accepted Answer

If the lender correctly anticipates inﬂation and increases the nominal interest rate accordingly, then they will be able to offset the effects of inﬂation and not be penalized. This is because the nominal interest rate will be higher, meaning that the lender will earn a higher rate of return and can retain the purchasing power of their money. Choices A, B, and D do not provide a solution to the problem of inflation for the lender.

A Lender Need Not Be Penalized by Inﬂation If the