Question

The Fisher effect indicates that an increase in the expected inflation rate will cause the real rate of interest to:

Answer 1

The Fisher effect indicates that an increase in the expected inflation rate will cause the real rate of interest to: increase by the same amount.

What Is the Fisher Effect?

The Fisher Effect refers to the relationship between nominal interest rates, real interest rates, and inflation expectations. The relationship was first described by American economist Irving Fisher in 1930.

The relationship is described by the following equation:

                                   (1+i) = (1+r) * (1+π)

Where:

i = Nominal Interest Rate.

r = Real Interest Rate.

π = Expected Inflation Rate.

The Fisher Effect is an important relationship in macroeconomics. It describes the causal relationship between the nominal interest rate and inflation. It states that an increase in nominal rates leads to a decrease in inflation. The key assumption is that the real interest rate remains constant or changes by a small amount.

Hence , we can conclude that the correct option is A.

Your question is incomplete, but most probably your full question was:

The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to:

A. increase by the same amount.

B. decrease by the same amount.

C. become unpredictable.

D. remain relatively constant.

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