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

Question

Quizplus · Accepted Answer

According to the Fisher effect, the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Therefore, if the expected inflation rate decreases by 5 percent, the nominal interest rate would decrease by 5 percent to maintain the equilibrium.

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