Normally, a firm's borrowing cost is the expected real interest rate, which takes expected inflation into account. With price stickiness, however, the firm will consider only:
A) expected inflation.
B) expected wages.
C) the nominal rate of interest.
D) the expected appreciation of the asset.

Question

Quizplus · Accepted Answer

Price stickiness refers to a situation where prices do not adjust immediately to changes in supply and demand. In such a scenario, the nominal (or stated) interest rate is the relevant factor in determining a firm's borrowing cost, as opposed to the real interest rate which takes inflation into account. Therefore, the firm will consider only the nominal rate of interest in making borrowing decisions.

Normally, a Firm's Borrowing Cost Is the Expected Real Interest