Currently, Econia's nominal interest rate is 5%. Its inflation rate is forecast to rise from 2% to 3% next year. According to the Fisher effect, if Econia's inflation rate rises as predicted, then its nominal interest rate will be _____, and its real interest rate will be:
A) 6%; 3%.
B) 6%; 2%.
C) 4%; 1%.
D) 4%; 7%.

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, if Econia's inflation rate rises from 2% to 3%, then its nominal interest rate will rise from 5% to 6%. The real interest rate will remain unchanged at 3%.

Currently, Econia's Nominal Interest Rate Is 5