When inflation increases, the _______ of borrowing tends to decrease if nominal interest rates remain unchanged, affecting consumer spending and investment decisions.

When inflation increases, the real interest rate of borrowing tends to decrease if nominal interest rates stay the same. The real interest rate is what borrowers actually pay after adjusting for inflation. For example, if the nominal interest rate is 5% and inflation rises to 3%, the real interest rate is effectively only 2%. This lower real interest rate makes borrowing cheaper, encouraging consumers to spend more and businesses to invest in new projects. As a result, higher inflation can lead to increased economic activity, despite the fact that prices are rising.