Asked by Vanessa Huynh on Apr 30, 2024
Verified
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
Anticipated
Expected or foreseen based on current trends or available information.
Borrowers
Individuals or entities that receive funds from a lender with the agreement to repay the borrowed amount plus interest.
Lenders
Individuals or institutions that provide funds to borrowers under the condition of being repaid with interest.
- Understand the determination of real and nominal interest rates and their relationship with inflation.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
E
Explanation :
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.
Learning Objectives
- Understand the determination of real and nominal interest rates and their relationship with inflation.