Final answer:
The Fisher equation indicates that changes in either the real interest rate or expected inflation can result in variations in the nominal interest rate. Supply and demand in the financial markets determine specific interest rates, with non-price variables affecting shifts in the supply or demand curve.
Step-by-step explanation:
The Fisher equation states that the nominal interest rate can change for two reasons: because the real interest rate changes or because the expected inflation changes. Nominal interest rates are affected by the federal funds rate set by monetary policy, but specific market interest rates are determined by supply and demand forces in the financial markets.
Changes in the nominal interest rate can cause a movement along the supply or demand curve for financial capital depending on whether the change is due to price or non-price variables. If factors like income or future needs (non-price variables) change, they could shift the supply curve, while changes in confidence about the future or changes in borrowing needs (non-price variables) could shift the demand curve.