Question

The Fisher effect states that the: a) expected real rate of interest increases by one percentage point for each percentage change in expected inflation. b) nominal rate of interest is unaffected by the change in unexpected inflation. c) nominal rate of interest is unaffected by the change in expected inflation. d) expected real rate of interest is unaffected by the change in expected inflation.

Answer 1

Answer:

A. The expected real rate of interest increases by one percentage point for each percentage change in expected inflation.

Explanation:

The Fisher effect is an economic term referred to as the relationship between real and nominal interest rates with inflation. This theory explains that the real interest rate is equal to the nominal interest rate minus the expected inflation rate. In other words, if nominal rates do not increase at the same rate as inflation, then real interest rates will fall while inflation increases.