Question 49

Real interest rate equals nominal minus expected inflation is known as the Fisher equation.

The Fisher equation describes the relationship between nominal interest rates, real interest rates, and expected inflation, stating that the real interest rate can be calculated by subtracting expected inflation from the nominal interest rate.

A) Fisher equation

This option is correct as the Fisher equation explicitly defines the relationship between real interest rates, nominal interest rates, and expected inflation. It is a fundamental concept in economics that explains how inflation affects the purchasing power of interest earnings.

B) Quantity theory

The quantity theory of money relates the quantity of money in an economy to the level of prices of goods and services, but it does not encompass the relationship between nominal interest rates and inflation. Therefore, this option is incorrect regarding the specific definition provided in the question.

C) Money multiplier

The money multiplier is a concept that describes how an initial deposit can lead to a greater final increase in the total money supply within an economy, but it does not relate to the calculation of real interest rates or inflation. Thus, this option is incorrect.

D) Keynesian cross

The Keynesian cross is a model that illustrates the relationship between aggregate supply and aggregate demand in the short run, focusing on equilibrium in the goods market. It does not pertain to interest rates or inflation, making this option incorrect as well.

Conclusion

The Fisher equation is the only option that accurately captures the relationship between real interest rates, nominal interest rates, and expected inflation. All other options, while relevant in the broader context of economics, do not address the specific equation or relationship described in the question. Therefore, option A is definitively correct.