In the long run, when an economy experiences inflation, the price level ________ and the nominal interest rate ________.
A) rises; remains constant
B) remains constant; rises
C) rises; rises
D) falls; rises
E) rises; falls

Question

Quizplus · Accepted Answer

When an economy experiences inflation, the price level rises, and as a result, the nominal interest rate also rises. This happens because lenders demand a higher nominal interest rate to compensate for the loss in the purchasing power of the money they receive in the future. Additionally, borrowers are willing to pay a higher nominal interest rate as they expect their incomes to rise with inflation, making it easier to pay back the loan.

In the Long Run, When an Economy Experiences Inflation, the Price