The economic theory that explains how a country with a higher nominal interest rate should have a higher inflation rate is

Question

Quizplus · Accepted Answer

The Fisher Effect explains that a country with a higher nominal interest rate should have a higher inflation rate. This theory is based on the idea that real interest rates (nominal interest rates adjusted for inflation) should be equal across countries in order to maintain a balance of trade between them. Therefore, if one country has a higher nominal interest rate than another, it must also have a higher expected inflation rate in order to achieve the same real interest rate.

The Economic Theory That Explains How a Country with a Higher