The Fisher effect is
A) The one-for-one adjustment of the nominal interest rate to the rate of growth of real GDP.
B) The one-for-one adjustment of the nominal interest rate to the inflation rate.
C) The effect of changes in the velocity of money on the nominal interest rate.
D) The effect of a current account deficit on the nominal interest rate.

Question

Quizplus · Accepted Answer

The Fisher effect is the one-for-one adjustment of the nominal interest rate to the inflation rate. It suggests that nominal interest rates adjust to expected inflation in order to maintain the same real interest rate. Therefore, when inflation is expected to increase, nominal interest rates will also increase in order to compensate for the decrease in purchasing power of money.

The Fisher Effect Is