Empirical evidence shows that the nominal interest rate typically rises at the same time the inflation rate increases. What does this suggest?

Question

Quizplus · Accepted Answer

When the nominal interest rate increases at the same time as the inflation rate, it suggests that borrowers and lenders expect that inflation in the future will be higher than previously thought. This is because lenders will demand higher interest rates to compensate them for the anticipated loss of purchasing power caused by inflation, while borrowers will be willing to pay higher rates believing that they will be able to repay their debts with cheaper dollars in the future. This phenomenon is captured by the Fisher effect, which states that nominal interest rates adjust to expected inflation, leaving the real interest rate unchanged in the long run.

Empirical Evidence Shows That the Nominal Interest Rate Typically Rises