According to the Fisher hypothesis, an increase in the expected inflation rate should lead to____ in the nominal Interest rate and ____ in the expected real interest rate.
A)an increase; a decrease
B)an increase; no change
C)an increase; an increase
D)a decrease; a decrease

Question

Quizplus · Accepted Answer

The Fisher hypothesis posits that an increase in the expected inflation rate will lead to an increase in the nominal interest rate, but the expected real interest rate will remain unchanged. This is because lenders will demand higher nominal rates to compensate for the expected loss of purchasing power due to inflation, but the real return they expect to achieve, after accounting for inflation, does not change.

According to the Fisher Hypothesis, an Increase in the Expected