If inflation in the United States is 4% per year and in the United Kingdom it is 8% per year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that the interest rate in the United States is:
A) 2%.
B) 4%.
C) 6%.
D) 8%.

Question

Quizplus · Accepted Answer

The Fisher effect states that the real interest rate is equal across countries. Given the UK interest rate of 6% and inflation of 8%, the real rate is -2%. With US inflation at 4%, the nominal interest rate in the US should be 6% to maintain the same real rate.

If Inflation in the United States Is 4% Per Year