For a given nominal interest rate,a reduction in expected inflation will cause
A)a reduction in the real interest rate.
B)an increase in the real interest rate.
C)an increase in investment.
D)an increase in money demand.

Question

Quizplus · Accepted Answer

A reduction in expected inflation means that the purchasing power of money will increase in the future. This makes holding money more valuable, and people will demand to borrow less money at the given nominal interest rate. As a result, lenders will reduce the real interest rates to attract borrowers, resulting in an increase in the real interest rate.

For a Given Nominal Interest Rate,a Reduction in Expected Inflation