Question

If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant. Group of answer choices True False

The higher the time preference, the lower the cost of money, other things held constant.
True False

Answer 1

True. When inflation is predicted to be quite strong, interest rates tend to fall. Because increasing inflation erodes the buying power of money over time, lenders seek higher interest rates to compensate for the predicted loss in value. Interest rates tend to be substantially higher when inflation is predicted to be low.

Concerning the second statement, it is incorrect. Money's cost is not entirely controlled by temporal preference (individual preference for current vs future spending). Other factors influencing the cost of money include inflation, risk, market circumstances, and monetary policy.