Question

According to the “Fisher Effect”, a 1% increase in nominal money growth results in:

(A) a 1% increase in the nominal interest rate in the long run
(B) a 1% decrease in the real interest rate in the long run
(C) A and B
(D) none of the above.

Please tell the correct answer

Answer 1

Explanation:

What Is the Fisher Effect?

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. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.