According to the Fisher effect, a 5% decrease in the expected inflation rate results in:
A) a 5% decrease in the nominal interest rate.
B) a more than 5% increase in the nominal interest rate.
C) a 5% decrease in the real interest rate.
D) a more than 5% increase in the real interest rate.

Question

Quizplus · Accepted Answer

The Fisher effect states that the nominal interest rate adjusts one-for-one with changes in the expected inflation rate, so a 5% decrease in expected inflation leads to a 5% decrease in the nominal interest rate.

According to the Fisher Effect, a 5% Decrease in the Expected