Which of the following is an example of the Fisher effect?
A) Expansionary monetary policy reduces inflation by 3%, and interest rates rise 3%.
B) Inflationary expectations rise from 2% to 6%, which causes interest rates to rise from 5% to 9%.
C) Contractionary monetary policy reduces inflation by 2%, and interest rates rise by 3%.
D) Inflationary expectations fall from 4% to 2%, which causes interest rates to rise from 6% to 8%.

Question

Quizplus · Accepted Answer

The Fisher effect describes the relationship between inflation and both real and nominal interest rates. According to the Fisher effect, if inflationary expectations rise, nominal interest rates will rise by the same amount if the real interest rate is unchanged. Choice B directly illustrates this principle by showing an increase in inflationary expectations from 2% to 6%, with a corresponding increase in interest rates from 5% to 9%.

Which of the Following Is an Example of the Fisher