Under PPP (And by the Fisher Effect), All Else Equal

question 26

Multiple Choice

Under PPP (and by the Fisher Effect) , all else equal

• A) a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.
• B) a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.
• C) a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.
• D) a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.
• E) a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

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Definitions:

Income Effect

The alteration in the consumption habits of a person or an economy due to a variation in actual income.

Inferior Good

A type of good for which demand decreases when income increases, and vice versa, unlike normal goods where demand increases with an increase in income.

Marginal Utility

The additional enjoyment or value that comes from the consumption of one more unit of a product or service.

Optimal Consumption

The allocation of resources or choosing of goods and services that maximizes the utility or satisfaction of a consumer, given their budget constraints.