If people suddenly anticipate that inflation will rise during the next year, which of the following is most likely?
A) Nominal interest rates will rise.
B) Nominal interest rates will decline.
C) The demand for goods and services will decline.
D) Both the real and nominal interest rates will decline.

Question

Quizplus · Accepted Answer

When people anticipate that inflation will rise, they will demand higher nominal interest rates as compensation for the expected loss of purchasing power of their money. Lenders will have to raise nominal interest rates to protect their returns from being eroded by inflation.

If People Suddenly Anticipate That Inflation Will Rise During the Next