The Fisher effect predicts that the nominal interest rate:
A) rises as the expected inflation rate rises.
B) falls as the expected inflation rate rises.
C) remains the same as the expected inflation rate changes.
D) changes only if the unexpected inflation rate changes,but not with the expected inflation rate.

Question

Quizplus · Accepted Answer

The Fisher effect predicts that the nominal interest rate (i) will rise in response to an increase in expected inflation (π). It states that the real interest rate (r) is equal to the nominal interest rate minus expected inflation: r = i - π. Therefore, if expected inflation increases, the nominal interest rate must also increase to maintain the same real interest rate.

The Fisher Effect Predicts That the Nominal Interest Rate