If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the nominal interest rate to be:

Question

Quizplus · Accepted Answer

The Fisher Effect states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Therefore, an increase in the money growth rate would lead to an increase in the expected inflation rate. Using the Fisher Effect equation, we can calculate the new nominal interest rate as follows: 
Nominal interest rate = Real interest rate + Expected inflation rate 
= 5% - 3% + 5% 
= 7% 
Therefore, the answer is choice B.

If the Inflation Rate Is 3% and the Nominal Interest