According to the Fisher effect, if the real interest rate is three per cent and the inflation rate is seven per cent, then the nominal interest rate equals:
A)three per cent
B)four per cent
C)seven per cent
D)10 per cent

Question

Quizplus · Accepted Answer

The Fisher effect states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Therefore, nominal interest rate = real interest rate + inflation rate.
In this case, real interest rate = 3% and inflation rate = 7%. 
Thus, nominal interest rate = 3% + 7% = 10%. Therefore, option (D) 10% is the correct answer.

According to the Fisher Effect, If the Real Interest Rate