If borrowers and lenders expect a higher rate of inflation,
A) nominal interest rates will tend to fall.
B) real interest rates will tend to fall.
C) nominal interest rates will tend to rise.
D) real interest rates will tend to rise.

Question

Quizplus · Accepted Answer

If borrowers and lenders expect a higher rate of inflation, they will demand a higher nominal interest rate to compensate for the expected inflation. Therefore, nominal interest rates will tend to rise. However, real interest rates may not necessarily rise if the increase in nominal interest rate is offset by the increase in inflation.

If Borrowers and Lenders Expect a Higher Rate of Inflation