The _____ states that a country's "nominal" interest rate is the sum of the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent.

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Quizplus · Accepted Answer

The Fisher Effect states that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate. Therefore, the correct answer is D, Fisher Effect. PPP theory (A) states that exchange rates should adjust to keep the price of a basket of goods constant across countries, while efficient market theory (B) assumes that asset prices always reflect all available information, and inefficient market theory (C) states that asset prices can deviate from their intrinsic value, creating opportunities for arbitrage.

The _____ States That a Country's "Nominal" Interest Rate Is