Question

According to the Fisher effect, if inflation rises then the nominal interest rate rises.

Select one:

True

False

Answer 1

Fisher equation is given by :

Nominal interest rate(i) = real interest rate(r) + inflation rate(e)

According to Fisher(or classical dichotomy) nominal variables(like inflation rate) effect nominal variables(like nominal interest rate) only. More precisely. according to Fisher there is one to one relation between nominal interest rate and inflation rate i.e. when inflation rate increases by 1% then nominal interest rate also increases by 1% and vice versa. thus as inflation rate rises, Nominal interest rate also rises.

Hence, this statement is True.