Under PPP (and by the Fisher Effect), all else equal
A) a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.
B) a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.
C) a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.
D) a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.
E) a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

Question

Quizplus · Accepted Answer

The Fisher Effect posits that the real interest rate is unaffected by monetary measures in the long run. Therefore, an increase in the expected inflation rate should lead to an equal increase in the nominal interest rate to maintain the real interest rate constant. This principle aligns with the idea that lenders need to be compensated for the loss in purchasing power due to inflation, leading to an equal rise in interest rates in response to a rise in inflation.

Under PPP (And by the Fisher Effect), All Else Equal