Expected Inflation: Understanding the Impact | Test Prep

Expected Inflation

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Question

Which of the following statements about expected inflation are true?

Answers

A. Interest rate volatility will increase

B. Price increases will typically outpace increases in wages

C. All of these answers are correct

D. Lenders are not compensated for the loss of purchasing power when funds are repaid

E. None of these answers is correct

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Explanations

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A. B. C. D. E.

Market participants will compensate for expected inflation. For example, when lenders make loans, they will price a certain inflation rate into the interest rate. If inflation is as expected, then the rate will adequately compensate the lender for lost purchasing power. Inflation is generally assumed to impact all prices, including wages, equally, therefore workers will demand wage increases in line with inflation.

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