The higher the expected inflation,_____.
A)the higher the nominal rate of interest that lenders require and that borrowers are willing to pay
B)the lower the nominal rate of interest that lenders require and that borrowers are willing to pay
C)the higher the nominal rate of interest that lenders require and the lower the nominal rate of interest that borrowers are willing to pay
D)the higher the real interest rate that lenders require
E)the higher the real interest rate that borrowers are willing to pay

Question

Quizplus · Accepted Answer

When inflation is expected to be high, lenders will require a higher nominal rate of interest to compensate for the decrease in the purchasing power of the money they will receive in the future. Borrowers, on the other hand, will be willing to pay a higher nominal rate of interest as they will need to repay the money in the future with money that has less purchasing power. Therefore, the higher the expected inflation, the higher the nominal rate of interest that lenders require and that borrowers are willing to pay.

The Higher the Expected Inflation,_____