If an expansionary monetary policy raises expectations for inflation, then interest rates:
A) may not fall as normally expected but may rise due to the Fisher effect.
B) may not rise as normally expected but may fall due to the Fisher effect.
C) will rise but will rise even more than normally expected due to the Fisher effect.
D) will fall but will fall even more than normally expected due to the Fisher effect.

Question

Quizplus · Accepted Answer

The Fisher effect describes the relationship between nominal interest rates, real interest rates, and inflation. When people expect higher inflation due to expansionary monetary policy, lenders demand higher nominal interest rates to compensate for the loss of purchasing power over time. This can lead to nominal interest rates rising, not falling, as might be expected with an expansionary policy aimed at lowering rates.

If an Expansionary Monetary Policy Raises Expectations for Inflation, Then