The Fisher equation implies that an increase in the nominal rate of interest relative to the real rate indicates that ________.
A)inflation is expected to rise
B)inflation is expected to decrease
C)the real cost of borrowing has increased
D)the real cost of borrowing has decreased
E)none of the above

Question

Quizplus · Accepted Answer

The Fisher equation states that the nominal interest rate is equal to the sum of the expected real interest rate and expected inflation rate. Therefore, if the nominal interest rate increases relative to the real interest rate, it must be due to an increase in the expected inflation rate.

The Fisher Equation Implies That an Increase in the Nominal