The higher the expected rate of inflation,

Question

Quizplus · Accepted Answer

The Fisher effect states that the nominal interest rate is equal to the real interest rate plus the expected rate of inflation. Therefore, if the expected rate of inflation increases, the nominal interest rate will also increase. However, the real interest rate (which is adjusted for inflation) will decrease because the nominal interest rate and inflation are positively related. Thus, the higher the expected rate of inflation, the lower is the real rate of interest.

The Higher the Expected Rate of Inflation