During a period of persistent inflation,
A) borrowers will systematically gain at the expense of lenders.
B) nominal interest rates will rise and eventually reflect the expected rate of inflation.
C) once borrowers and lenders fully anticipate the inflation rate, there is no reason to expect that either will systematically gain relative to the other.
D) both b and c are correct.

Question

Quizplus · Accepted Answer

Nominal interest rates will eventually rise to reflect the expected rate of inflation, which means that lenders will receive compensation for the expected loss in purchasing power caused by inflation. Once borrowers and lenders fully anticipate the inflation rate, there is no reason for either party to systematically gain relative to the other. Therefore, both options B and C are correct. However, in the short run, borrowers may gain at the expense of lenders as nominal interest rates may not immediately adjust to reflect the increase in inflation.

During a Period of Persistent Inflation