Suppose People Expect There to Be a Substantial Increase in the Rate

Multiple Choice

Suppose people expect there to be a substantial increase in the rate of inflation over the next few years. Which of the following would you predict?

A) An increase in the real interest rate and a decrease in the nominal interest rate
B) No increase or decrease in the nominal and real interest rates
C) A constant nominal interest rate and a higher real interest rate
D) A higher nominal interest rate
E) A decline in the nominal interest rate