Historically, why have high inflation rates tended to be associated with high nominal interest rates?
A)Growth in investment and savings is encouraged when consumers are judged to be overspending.
B)High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term.
C)The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
D)Individuals will spend more when they expect their investments to increase in value.

Question

Quizplus · Accepted Answer

High inflation rates lead to high nominal interest rates because lenders need to ensure that the real interest rate (the nominal interest rate adjusted for inflation) is positive so that the purchasing power of the money they are repaid in the future is not less than the money they lend out. This means that as inflation increases, nominal interest rates must also increase to maintain a positive real interest rate, ensuring that savings and investments retain their value over time.

Historically, Why Have High Inflation Rates Tended to Be Associated