Historically, why were high inflation rates associated with high nominal interest rates?
A) Individuals will spend more when they expect their investments to increase in value.
B) Growth in investment and savings is encouraged when consumers are judged to be overspending.
C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term.
D) 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.

Question

Quizplus · Accepted Answer

High inflation reduces the future purchasing power of money, so lenders demand higher nominal interest rates to compensate for this loss. This ensures that the real interest rate (the nominal interest rate adjusted for inflation) remains positive, allowing savers to expect their savings to grow in real terms over time.

Historically, Why Were High Inflation Rates Associated with High Nominal