The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:
A) money supply is constant.
B) velocity is constant.
C) inflation rate is constant.
D) real interest rate is constant.

Question

Quizplus · Accepted Answer

The Fisher effect assumes that the real interest rate is constant, meaning that the nominal interest rate adjusts one-to-one with changes in the inflation rate to maintain a constant real interest rate. The other options (money supply, velocity, and inflation rate) are not assumed to be constant in the Fisher effect.

The One-To-One Relation Between the Inflation Rate and the Nominal