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    Question

    The Fisher effect is defined as the relationship

    between which of the following variables? 
    A default risk premium, inflation risk premium, and real rates Correct Answer Incorrect Answer
    B nominal rates, real rates, and interest rate risk premium Correct Answer Incorrect Answer
    C interest rate risk premium, real rates, and default risk premium Correct Answer Incorrect Answer
    D real rates, inflation rates, and nominal rates Correct Answer Incorrect Answer
    E real rates, interest rate risk premium, and nominal rates Correct Answer Incorrect Answer

    Solution

    The Fisher equation is a concept in economics that determines the relationship between nominal and real interest rates under the effect of the inflation. The equation states that the nominal interest rate is equal to the sum of the real interest rate and inflation. According to Fisher equation : R Nominal = R Real + R Inflation Real Interest Rates : A real interest rate is the interest rate that takes inflation into account. This means it adjusts for inflation and gives the real rate of a bond or loan. Nominal Interest Rates : A nominal interest rate refers to the interest rate before taking inflation into account.  It is the interest rate quoted on bonds and loans. 

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