The relationship between nominal rates,real rates,and inflation is known as the:
A)Miller and Modigliani theorem.
B)Fisher effect.
C)Gordon growth model.
D)term structure of interest rates.
E)interest rate risk premium.

Question

Quizplus · Accepted Answer

The relationship between nominal rates, real rates, and inflation is known as the Fisher effect. The Fisher effect states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Therefore, if inflation is expected to increase, nominal rates will also increase to compensate for the loss in purchasing power of money. Conversely, if inflation is expected to decrease, nominal rates will also decrease.

The Relationship Between Nominal Rates,real Rates,and Inflation Is Known as The