Economists Forecast the Following Inflation Rates for the Next Four

Multiple Choice

Economists forecast the following inflation rates for the next four years: What inflation adjustment should be included in the interest rate on a three-year loan made today?

A) 3%, because that's the rate at the time the loan is made and borrowers won't pay any more
B) 4%, because that's the average expected inflation rate over the life of the loan
C) 6%, because that's the rate that will exist when the lender is loaning the money out again
D) 6%, because at a lower rate the lender will have lost purchasing power by the time it lends the money out again