Question

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 2%. But if the rate of inflation was expected to be 4%, the bank would most likely charge the firm an annual interest rate of ____. 2% 10% 4% 6%

Answer 1

But if rate of inflation was expected to be 4%, bank would most likely charge firm an annual interest rate of 2%.

What is inflation?

The general increase in the price of goods and services across the whole economy of a nation is referred to as inflation in the study of economics. Deflation, which is a sustained decrease in the level of prices for goods and services, is the reverse of inflation. Since price increases are not constant, the consumer price index (CPI) is widely used for this purpose. Using the employment cost index, salaries are also calculated in the US. Low- to moderate-inflation is a topic that has a wider variety of perspectives. Low or moderate inflation may be brought on by actual changes in consumer demand for goods and services or supply adjustments, such as those that take place during times of scarcity. lowering unemployment caused by nominal wage rigidity and granting the central bank more freedom in implementing monetary policy.

Annual interest rate=4/2=2%

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