Everything else the same, the higher the expected rate of inflation, _____.
A)the lower the loss in purchasing power of investors
B)the higher the required rate of return on an investment
C)the lower the maturity premium required by the investors
D)the higher the money supply in the economy
E)the lower the tax rate in the economy

Question

Everything else the same, the higher the expected rate of inflation, _____. 
A)the lower the loss in purchasing power of investors
B)the higher the required rate of return on an investment
C)the lower the maturity premium required by the investors
D)the higher the money supply in the economy
E)the lower the tax rate in the economy

Quizplus · Accepted Answer

When the expected rate of inflation is higher, investors will require a higher rate of return on their investment to compensate for the loss in purchasing power caused by inflation. This is due to the fact that the return on investment must cover both the risk-free rate and the expected inflation rate. Therefore, the answer is B.

Everything Else the Same, the Higher the Expected Rate of Inflation