Which of the following statements is correct?
A) For a given real interest rate, the nominal interest must decrease if expected inﬂation increases.
B) For a given nominal interest rate, the real interest will decrease if inﬂation decreases.
C) For a given expected inﬂation rate, the nominal interest must increase if real interest decreases.
D) For a given real interest rate, the nominal interest must increase if expected inﬂation increases.

Question

Quizplus · Accepted Answer

The Fisher effect states that for a given real interest rate, the nominal interest rate must increase one-for-one with expected inflation. This means that if expected inflation increases, the nominal interest rate must also increase in order to maintain the same real interest rate. Therefore, option D is the correct statement. Option A is incorrect because the Fisher effect suggests that an increase in expected inflation will result in an increase in nominal interest rates, not a decrease. Option B is incorrect because a decrease in inflation would result in an increase in the real interest rate, not a decrease. Option C is incorrect because a decrease in real interest rate doesn't necessarily mean an increase in nominal interest rate; it can stay the same if expected inflation is low.

Which of the Following Statements Is Correct