Answer:
If inflation expectations rise, consumers and businesses may begin to anticipate higher prices for goods and services in the future. This can lead to an increase in demand for credit, as consumers and businesses may want to borrow money to make purchases before prices rise further. This increased demand for credit can put upward pressure on interest rates, as lenders may want to charge higher rates to compensate for the increased risk of inflation.
In addition, rising inflation expectations can lead to a decrease in the value of money, as consumers and businesses may begin to view cash as a less valuable asset. This can lead to a decrease in the demand for money, as consumers and businesses may want to hold less cash and invest in other assets that are expected to hold their value better in the face of inflation. This decrease in demand for money can also put upward pressure on interest rates, as lenders may want to charge higher rates to compensate for the decreased demand for money.
Therefore, even in the absence of any change to monetary policy, rising inflation expectations can lead to an increase in interest rates in the short run, as lenders may want to charge higher rates to compensate for the increased demand for credit and decreased demand for money.