Question

Evidence from the past seven decades in the United States supports the Fisher effect and shows that when the inflation rate is low for a few years, the ______ interest rate tends to be ______.

	a.	nominal; high
	b.	nominal; low
	c.	real; high
	d.	real; low

Answer 1

Answer

The correct answer is "option a".

a. nominal; high

Evidence from the past seven decades in the United States supports the Fisher effect and shows that when the inflation rate is low for a few years, the nominal interest rate tends to be high.

The Fischer effect shows the relationship between real and nominal interest rates and the inflation rate.
Nominal rate= real rate + expected inflation rate
(1+R)=(1+r)(1+h)
Where
R=Nominal rate
r= real rate
h=expected inflation rate