The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to:
A) remain relatively constant.
B) increase by the same amount.
C) decrease by the same amount.
D) become unpredictable.

Question

Quizplus · Accepted Answer

The Fisher effect suggests that an increase in the expected inflation rate will cause an equivalent increase in the nominal interest rate, thus ensuring that the real interest rate remains constant. Conversely, a decrease in the expected inflation rate would cause a decrease in the nominal interest rate. Therefore, the nominal rate of interest will increase by the same amount as the expected inflation rate.

The Fisher Effect Indicates That an Increase in the Expected