If borrowers and lenders expect a higher rate of inflation,
A)nominal interest rates should decrease.
B)nominal interest rates should remain constant.
C)nominal interest rates should increase.
D)real interest rates should increase.

Question

Quizplus · Accepted Answer

If borrowers and lenders expect a higher rate of inflation, they will demand higher nominal interest rates to compensate for the loss in purchasing power of the money lent. Therefore, nominal interest rates should increase.

If Borrowers and Lenders Expect a Higher Rate of Inflation