What explains the trends in nominal interest rates?
A) inflation rates
B) aggregate economic activity
C) standards of living
D) wages
E) consumer incomes

Question

Quizplus · Accepted Answer

Inflation rates have a significant impact on nominal interest rates. Inflation erodes the purchasing power of money over time, so lenders demand higher nominal interest rates to compensate for the expected loss of value of their money loaned. Higher inflation rates lead to higher nominal interest rates as lenders demand a higher rate of return to compensate for the expected loss of purchasing power.

Answer: B 
 Aggregate economic activity can also influence nominal interest rates. During a period of economic growth, investors expect higher returns on their investments due to increased demand for loans and higher profits. This can drive up nominal interest rates. In contrast, during a recession, investors may be less willing to invest, leading to lower nominal interest rates to stimulate economic activity.

What Explains the Trends in Nominal Interest Rates