If future price changes were perfectly anticipated by both borrowers and lenders,then _____.
A)the expected real interest rate would be higher than the actual rate
B)the expected real interest rate would lower than the actual rate
C)the real interest rate in the future would decrease by the amount of the price increase
D)the real interest rate in the future would increase by the amount of the price increase
E)the real interest rate in the future would remain unchanged

Question

Quizplus · Accepted Answer

If changes in prices are perfectly anticipated, borrowers and lenders will have already factored them into their expectations for future inflation and interest rates. Therefore, there will be no additional surprise inflation or deflation that could cause interest rates to adjust further. As a result, the real interest rate in the future would remain the same.

If Future Price Changes Were Perfectly Anticipated by Both Borrowers