People know that the inflation rate will increase from 3 percent to 5 percent. As a result
A) the nominal interest rate is constant.
B) the real interest rate rises by 2 percentage points.
C) the nominal interest rate falls by 2 percentage points.
D) the nominal interest rate rises by 2 percentage points.

Question

Quizplus · Accepted Answer

According to the Fisher equation, the nominal interest rate is the sum of the real interest rate and the expected inflation rate. If the inflation rate increases by 2 percentage points, the nominal interest rate will also rise by 2 percentage points to maintain the same real interest rate.

People Know That the Inflation Rate Will Increase from 3