In the long run, the nominal interest rate is
A) negatively related to the price level.
B) positively related to the price level.
C) negatively related to the inflation rate.
D) positively related to the inflation rate.
E) not related to the price level or the inflation rate.

Question

Quizplus · Accepted Answer

The nominal interest rate includes two components: the real interest rate and the expected inflation rate. When inflation is high, lenders require a higher nominal interest rate to compensate for the reduction in purchasing power of the money they will be repaid with. Therefore, the nominal interest rate is positively related to the inflation rate.

In the Long Run, the Nominal Interest Rate Is