If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 3%, then we would expect the nominal interest rate to be:

Question

Quizplus · Accepted Answer

The Fisher effect states that nominal interest rates will adjust in response to changes in inflation rates. With a 2% inflation rate and a 4% nominal interest rate, the real interest rate would be 2%. If the money growth rate increases to 3%, it is expected that inflation will also increase. Using the Fisher effect equation, we can calculate the new nominal interest rate: 4% = 2% (expected inflation rate) + 2%. Therefore, the new nominal interest rate would be 5%.

If the Inflation Rate Is 2% and the Nominal Interest