Nominal rates of return decline by less than any given decrease in the expected inflation rate, according to recent research.

Question

Quizplus · Accepted Answer

This phenomenon is often observed because nominal interest rates incorporate expectations about future inflation. When expected inflation decreases, nominal rates also tend to decrease but by a smaller magnitude, as they also reflect real rates of return and other factors not directly tied to inflation expectations.

Nominal Rates of Return Decline by Less Than Any Given