Given that real interest rates are constant,an increase in the expected rate of inflation will tend to
A)decrease the nominal rate of interest.
B)increase the nominal rate of interest.
C)cause lower inflation rates.
D)cause no change in the nominal rate of interest.

Question

Quizplus · Accepted Answer

An increase in the expected rate of inflation will lead to an increase in the nominal rate of interest to compensate for the loss in purchasing power caused by inflation. This is because lenders will demand a higher rate of return to maintain their purchasing power, and borrowers will be willing to pay a higher rate of interest to secure the funds they need. Therefore, the correct choice is B.

Given That Real Interest Rates Are Constant,an Increase in the Expected