Everything else held constant,when the inflation rate is expected to rise,interest rates will ________;this result has been termed the ________.
A)fall;Keynes effect
B)fall;Fisher effect
C)rise;Keynes effect
D)rise;Fisher effect

Question

Quizplus · Accepted Answer

According to the Fisher effect, when the inflation rate is expected to rise, interest rates will also rise to compensate for the decrease in purchasing power of money. Therefore, the correct answer is D, rise; Fisher effect. Option A, fall; Keynes effect, is incorrect because the Keynes effect suggests that interest rates fall when aggregate demand falls, leading to deflation rather than inflation.

Everything Else Held Constant,when the Inflation Rate Is Expected to Rise,interest