The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should increase by 4 percentage points and the real interest rate should remain unchanged.

Question

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The Fisher effect states that the nominal interest rate should increase by the same amount as the expected inflation rate, so if inflation rises by 4 percentage points, the nominal interest rate should also increase by 4 percentage points. If the real interest rate remains unchanged, this would result in an increase in the nominal interest rate equal to the increase in the inflation rate.

The Fisher Effect Suggests That, in the Long Run, If