A Lender Need Not Be Penalized by Inflation If the

question 59

Multiple Choice

A lender need not be penalized by inflation if the

• A) long-term rate of inflation is less than the short-term rate of inflation.
• B) short-term rate of inflation is less than the long-term rate of inflation.
• C) lender correctly anticipates inflation and increases the nominal interest rate accordingly.
• D) inflation is unanticipated by both borrower and lender.

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Definitions:

Keynesian Theory

An economic theory stating that government intervention through fiscal policy is necessary to manage the cyclical nature of economies and adjust to demand shocks.

Real GDP

An inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, providing a more accurate picture of economic growth than nominal GDP.

Potential Real GDP

The maximum amount of goods and services that an economy can produce when it is fully employing its resources with efficiency, without causing inflation.

Prices

The amount of money required to purchase a good or service, often influenced by supply and demand dynamics.