Econia's banks have been charging an interest rate of 6.5% on loans while the inflation rate is 2.5%. The inflation rate is expected to drop to -1%. According to the Fisher effect, the banks' interest rate on new loans is likely to:
A) rise to 8%.
B) drop to 5.5%.
C) rise to 7.5%.
D) drop to 3%.

Question

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The Answer of Econia's banks have been charging an interest rate of 6.5% on loans while the inflation rate is 2.5%. The inflation rate is expected to drop to -1%. According to the Fisher effect, the banks' interest rate on new loans is likely to:
A) rise to 8%.
B) drop to 5.5%.
C) rise to 7.5%.
D) drop to 3%.

Econia's Banks Have Been Charging an Interest Rate of 6