Suppose the real interest rate is 2% per year, and the inflation rate is 3% per year. According to the Fisher effect, if the inflation rate rises to 4% per year, then eventually
A) the nominal interest rate will rise by approximately 1 percentage point, and the real interest rate will not change.
B) the real interest rate will fall, the nominal interest rate will rise, with i ‐ r = pi
C) the nominal interest rate will fall by approximately 1 percentage point, and the real interest rate will not change.
D) the real interest rate will fall by 1 percentage point, and the nominal interest rate will not change.
A

This Nominal interest rate paid or earned to the lender or investor. So if you, the borrower, borrow her 6% interest and he borrows $100, you can expect to pay $6 interest. Interest rates were raised to account for inflation.

What you mean by Real Interest Rate?

The real interest rate is the inflation-adjusted lending rate, measured by the GDP deflator. However, comparability is limited as the conditions relating to lending rates vary from country to country.

What the difference between nominal interest rate and real interest rate?

The Nominal interest rate is real interest rate and the expected inflation rate. The real interest rate reflects the true cost of funding for borrowers and the real rate of return for lenders or investors.

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