Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It will rise
B
It will fall
C
It will remain unchanged
D
It will fluctuate unpredictably
Understanding the Answer
Let's break down why this is correct
Answer
The Fisher equation describes the relationship between nominal interest rates, real interest rates, and inflation. If the nominal interest rate is expected to rise because people think inflation will increase, the real interest rate will likely stay the same if we assume other factors do not change. This is because the real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. For example, if the nominal rate is 5% and inflation is expected to be 3%, the real interest rate would be 2%. So, even if the nominal rate goes up to 6% due to rising inflation expectations, the real rate remains around 2% unless inflation rises significantly.
Detailed Explanation
When inflation goes up, the real interest rate goes down. Other options are incorrect because Some might think that higher nominal rates mean higher real rates; It's a common mistake to think that real rates stay the same when nominal rates change.
Key Concepts
Fisher equation
Purchasing power
Inflation expectations
Topic
Real Interest Rates and Inflation
Difficulty
hard level question
Cognitive Level
understand
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