Economic theory tells us that _____________ rates reflect expectations about likely future inflation rates.

Question

Quizplus · Accepted Answer

Interest rates reflect the cost of borrowing money and are closely tied to inflation expectations. Higher expectations of inflation will lead to higher interest rates to compensate lenders for the anticipated loss of purchasing power of their loaned funds. Conversely, lower expected inflation rates may lead to lower interest rates as lenders feel less compelled to require a higher return on their investment.

Economic Theory Tells Us That _____________ Rates Reflect Expectations About