How does unanticipated inflation typically affect interest rates in an economy?

Unanticipated inflation refers to a rise in prices that people did not expect, which can lead to various economic changes, especially in interest rates. When inflation is higher than expected, lenders want to protect themselves from losing money, so they may raise interest rates. This means that borrowing money becomes more expensive for consumers and businesses. For example, if a bank originally offered a loan at a 5% interest rate but inflation unexpectedly jumps to 7%, the bank might increase the interest rate to 8% to ensure they still make a profit. Overall, unanticipated inflation can lead to higher interest rates as lenders adjust to the changing economic conditions.