Ceteris paribus, a fall in expectations of inflation will lead to a ________ in nominal interest rates.

Question

Quizplus · Accepted Answer

A fall in expectations of inflation means that people expect inflation to be lower in the future, which decreases the demand for loans and increases the supply of savings in the economy. As a result, lenders (those supplying the loans) will lower the nominal interest rate to attract borrowers (those demanding the loans). Therefore, a fall in expectations of inflation will lead to a fall in nominal interest rates.

Ceteris Paribus, a Fall in Expectations of Inflation Will Lead