Assuming all else equal,the higher the expected inflation rate is in an economy,the ________.
A) higher will be the real interest rate
B) lower will be the real interest rate
C) lower will be the interest paid on reserves deposited at the Fed
D) lower will be the nominal interest rate

Question

Quizplus · Accepted Answer

The higher the expected inflation rate in an economy, the lower will be the real interest rate. This is because lenders will demand a higher nominal interest rate to compensate for the expected loss of purchasing power due to inflation. As a result, borrowers will have to pay a higher interest rate which will make borrowing more expensive, leading to a decrease in borrowing and investment activities. Hence, the higher expected inflation rate will lead to a decrease in the real interest rate.

Assuming All Else Equal,the Higher the Expected Inflation Rate Is