2.2. The Fisher effect

The Fisher effect explains the relationship between interest rates and expected inflation.

Which of the following equations best exemplifies the Fisher effect?

A. i = E(INF)iRi = E(INF)iR

B. E(INF)=iiRE(INF)=iiR

C. ir = i + E(INF)ir = i + E(INF)

D. i = E(INF)iRi = E(INF)iR

Suppose in a hypothetical economy, the nominal interest rate is 5% and the real interest rate is 2%.

The expected inflation rate is:

A. -3%

B. 1%

C. 3%

D. 7%