单选题

If market participants come to believe that the expected inflation rate embedded in the current nominal risk-free rate of interest is less than will actually occur, this will have the effect of（）。

A、 increasing demand for funds and decreasing the supply until the nominal risk-free rate decreases to reflect the new expectations.
B、 decreasing demand for funds and increasing the supply until the nominal risk-free rate increases to reflect the new expectations.
C、 increasing demand for funds and decreasing the supply until the nominal risk-free rate increases to reflect the new expectations.

【正确答案】 C

【答案解析】

If market participants come to believe that actual inflation will be greater than the expected inflation premium embedded in the nominal riskfree rate, the demand for financial capital will increase, the supply will decrease, and, eventually, the nominal risk-free rate will increase to reflect the new expectations.