The Fisher effect is the tendency of:
A) real interest rates to rise with expected inflation rates.
B) real interest rates to rise with unexpected inflation rates.
C) nominal interest rates to rise with expected inflation rates.
D) nominal interest rates to rise with unexpected inflation rates.

Question

Quizplus · Accepted Answer

The Fisher effect states that nominal interest rates will increase in proportion to expected inflation rates. This means that if investors expect inflation to rise, they will demand a higher nominal interest rate to compensate for the loss in purchasing power caused by inflation. However, the Fisher effect does not necessarily mean that real interest rates will increase with expected inflation rates. Real interest rates could remain constant or even decrease if inflation expectations are already priced into the nominal interest rate.

The Fisher Effect Is the Tendency Of