Which of the following best describes how a person's perception of future inflation will affect the nominal interest rate for borrowers and lenders?
A) the higher you think the inflation rate is likely to be, the higher the nominal interest rate you will offer as a borrower, and the higher the rate you will want as a lender
B) the higher you think the inflation rate is likely to be, the higher the nominal interest rate you will offer as a borrower, and the lower the rate you will want as a lender
C) the higher you think the inflation rate is likely to be, the lower the nominal interest rate you will offer as a borrower, and the higher the real interest rate you will want as a lender
D) the higher you think the inflation rate is likely to be, the lower the nominal interest rate you will offer as a borrower, and the lower the rate you will want as a lender

Question

Which of the following best describes how a person's perception of future inflation will affect the nominal interest rate for borrowers and lenders?  
A) the higher you think the inflation rate is likely to be, the higher the nominal interest rate you will offer as a borrower, and the higher the rate you will want as a lender 
B) the higher you think the inflation rate is likely to be, the higher the nominal interest rate you will offer as a borrower, and the lower the rate you will want as a lender 
C) the higher you think the inflation rate is likely to be, the lower the nominal interest rate you will offer as a borrower, and the higher the real interest rate you will want as a lender 
D) the higher you think the inflation rate is likely to be, the lower the nominal interest rate you will offer as a borrower, and the lower the rate you will want as a lender

Quizplus · Accepted Answer

When people expect higher inflation, borrowers are willing to pay higher nominal interest rates because the real value of the money they repay will be less. Similarly, lenders demand higher nominal interest rates to compensate for the decreased purchasing power of the money when it is repaid.

Which of the Following Best Describes How a Person's Perception