Assume the long-term nominal interest rate is 7% and the expected inflation rate is 3%.If the Bank of Canada increases the money supply and as a result,the expected inflation rate increases to 5%,then based on the Fisher effect,the long-term real interest rate will
A) remain at 4%.
B) increase to 6%.
C) fall to 3%.
D) increase to 9%.

Question

Quizplus · Accepted Answer

According to the Fisher effect, the real interest rate is the nominal interest rate minus the expected inflation rate. Initially, the real interest rate is 7% - 3% = 4%. If the expected inflation rate increases to 5%, the nominal interest rate will adjust to maintain the real interest rate at 4%, so it remains unchanged.

Assume the Long-Term Nominal Interest Rate Is 7% and the Expected