Question

Suppose the announcement of a new head of the central bank, with a reputation of being soft on inflation, increases expected inflation by 5 percentage points. According to the Fisher effect, what is the new nominal interest rate?

Answer 1

Answer:

Nominal interest rate (i)= expected inflation rate (f) + real interest rate (r)

i= 5+r

Explanation:

The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates.

The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.

The Fisher Effect can be seen each time you go to the bank; the interest rate an investor has on a savings account is really the nominal interest rate.