If investors expect a zero rate of inflation, then the nominal rate of return on a short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.

Question

Quizplus · Accepted Answer

This is known as the Fisher effect, which states that the nominal interest rate is equal to the real interest rate plus the expected rate of inflation. If investors expect zero inflation, then the nominal rate will be equal to the real rate (r*).

If Investors Expect a Zero Rate of Inflation, Then the Nominal