The Fisher equation implies that if expected inflation is higher than actual inflation,then:
A) the real interest rate will be equal to the equilibrium interest rate.
B) the real interest rate will be greater than the equilibrium interest rate.
C) the real interest rate will be less than the equilibrium interest rate.
D) both the real interest rate and equilibrium interest rate will become undetermined.

Question

Quizplus · Accepted Answer

The Fisher equation states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Therefore, if expected inflation is higher than actual inflation, the nominal interest rate will be higher than it should be in equilibrium. To bring the market back to equilibrium, the real interest rate must be higher than the nominal interest rate, which means that the real interest rate will be greater than the equilibrium interest rate.

The Fisher Equation Implies That If Expected Inflation Is Higher