Question

Expectations of high inflation lead to low interest rates and vice versa.

Answer 1

This is false.

When there is a strong expectation that rate of inflation is going to increase in future, people start consuming now and firms start increase their borrowing for future projects. Hence the liquidity in the market decreases and banks and other lending institutions start offering a higher nominal rate of interest (APR) to discourage borrowings in the event of high inflation. This is shown by a leftward shift of the supply curve and rightward shift of the demand curve in loanable funds market, thus raising the nominal interest rate to maintain the same real interest rate.