Economic theory suggests that when inflation is expected to be high:
A)interest rates will be low.
B)exchange rates will be high.
C)the International Fisher Effect does not hold.
D)interest rates will be high.

Question

Quizplus · Accepted Answer

Economic theory suggests that when inflation is expected to be high, interest rates will be raised by central banks to combat inflationary pressures. This is because higher interest rates make borrowing more expensive, which reduces consumer and business spending, ultimately reducing inflationary pressures. Therefore, the correct answer is that interest rates will be high.

Economic Theory Suggests That When Inflation Is Expected to Be