When inflation rises unexpectedly, it is generally the case that
A)nominal interest rates and real interest rates will both rise at the same rate
B)nominal interest rates will rise while real interest rates will decline
C)real interest rates will rise while nominal interest rates will decline
D)all nominal wages will immediately be adjusted upwards
E)real wages will have to be adjusted upwards

Question

Quizplus · Accepted Answer

When inflation rises unexpectedly, nominal interest rates will usually rise in response, but real interest rates may decline if the rise in inflation is greater than the increase in nominal rates. Real interest rates are the inflation-adjusted rate of return on an investment, so if inflation rises faster than nominal rates, the real return on investments will decline. This can lead investors to seek out higher-yielding investments, which can push prices up further and exacerbate inflationary pressures. As for choices (D) and (E), there is no guarantee that nominal or real wages will be adjusted upwards in response to inflation, as this decision is typically left up to employers and negotiators in wage negotiations.

When Inflation Rises Unexpectedly, It Is Generally the Case That