The higher the expected inflation, _____
A) the higher the nominal rate of interest that lenders require and that borrowers are willing to pay.
B) the lower the nominal rate of interest that lenders require and that borrowers are willing to pay.
C) the higher the nominal rate of interest that lenders require and the lower the nominal rate of interest that borrowers are willing to pay.
D) the lower the real interest rate that lenders require.
E) the higher the real interest rate that borrowers are willing to pay.

Question

Quizplus · Accepted Answer

Expected inflation decreases the future purchasing power of money, which means lenders will require a higher nominal interest rate to compensate for the decrease in value. Borrowers, on the other hand, may be willing to pay a higher nominal interest rate to compensate for the lower future value of the money they are borrowing. Therefore, as expected inflation increases, the nominal interest rate also increases.

The Higher the Expected Inflation, _____