In its approximate form the Fisher effect may be written as ________, where i = the nominal rate of interest, r = the real rate of return and ? = the expected rate of inflation.

Question

Quizplus · Accepted Answer

The Fisher effect in its approximate form is i = r + ?. This equation states that the nominal rate of interest (i) is equal to the real rate of return (r) plus the expected rate of inflation (?). This means that if inflation is expected to be 2%, the nominal rate of interest would need to be at least 2% higher than the real rate of return in order for investors to earn a positive real rate of return. Choice A is incorrect because it only includes the expected rate of inflation without the real rate of return. Choice B is incorrect because it adds the real rate of return twice. Choice D is incorrect because it includes twice the expected rate of inflation.

In Its Approximate Form the Fisher Effect May Be Written