Which of the Following Best Describes Inflation Risk

question 25

Multiple Choice

Which of the following best describes inflation risk?

• A) The chance that a borrower will fail to repay a loan on time or default on the loan.
• B) The chance that a major destructive event will reduce the rate of return on an investment.
• C) The chance that the Federal Reserve will reduce the money supply, causing the borrower to have difficulty repaying the loan.
• D) The danger that the overall price level will rise faster than the lender expected, so that the lender is paid back in dollars that are worth less than expected.

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Definitions:

Price Level

A measure of the average prices of goods and services in an economy, which can affect purchasing power and inflation.

Inflation

The speed at which overall prices for products and services increase, leading to a decline in buying power.

Price Changes

Adjustments in the cost of goods and services in the market, often influenced by factors like supply and demand, inflation, and government policies.

Menu Costs

Menu costs are the costs to firms of changing their prices, including the physical costs of changing price tags and the intangible costs of updating pricing information.