Inflation and nominal interest rates haveGroup of answer choicespositive relationinversely relatednegative relationno relation

Explanation of the Relationship

1. Understanding Inflation and Nominal Interest Rates:

   • Inflation refers to the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power.
   • Nominal interest rates are the rates of interest before adjustments for inflation.

2. Theories of Economic Relationships:

   • The Fisher Effect states that nominal interest rates adjust to expected inflation. According to this theory, when inflation increases, nominal interest rates tend to increase as well.

3. Analysis of the Options:

   • Positive Relation: This suggests that as one variable increases, the other does as well, which aligns with the Fisher Effect.
   • Inversely Related: This would imply that as one increases, the other decreases, which contradicts established economic principles.
   • Negative Relation: Similar reasoning as inversely related; this does not hold.
   • No Relation: This implies no effect between inflation and nominal rates, which is also inaccurate.

Conclusion

Based on the explanations and economic theories, the correct choice is that inflation and nominal interest rates are positively related. Higher inflation typically leads to higher nominal interest rates, reflecting the expectation of inflation in the returns on investments.