Fisher Effect Case Study

796 Words4 Pages
supply side due to the increase in the cost of the general price level caused by the sustained significant rise. Fisher effect
The Fisher effect was first discovered by the famous economist Irving Fisher to reveal the relationship between inflation expectations and interest rates. It points out that when inflation is expected to rise, interest rates will also rise. In this case,
The Fisher Effect Formula
Real Interest Rate = Nominal Interest Rate - Inflation Rate
The left and right sides of the formula to look at, the formula becomes:
Nominal Interest Rate = Real Interest Rate + Inflation Rate
In an economic system, the real interest rate is often constant, because it represents the actual purchasing power of you. In this case,
Thus, when the
…show more content…
In this case, As the inflation rate is only at the general level, the product term rh will be small and often ignored when calculating, so: r = Rh This formula is known as the Fisher effect, which indicates the nominal interest rate (including annual inflation premium) Is sufficient to compensate for the anticipated loss of purchasing power experienced by the lender in the currency received at maturity. Ie the lender's nominal interest rate is high enough to allow them to obtain the expected real interest rate, which is the operating reward of the physical asset in the society plus the risk compensation given to the borrower. The Fisher effect means that if the expected inflation rate increases by 1%, the nominal interest rate will increase by 1%, that is, the effect is one-to-one. In this case in this case, The Fisher effect shows that when the price level rises, the interest rate tends to increase. When the price level falls, the interest rate tends to…show more content…
Fisher hypothesized that there should be a long-run relationship in the adjustment of the nominal interest rate corresponding to changes in expected inflation. He postulated that the nominal interest rate consists of an expected“real” rate plus an expected inflation rate. The real rate of interest is determined largely by the time preference of economic agents and the return on the real investment. These factors are believed to be roughly constant over time, and therefore, a fully perceived change in the purchasing power of money should be accompanied by a one-for-one change in the nominal interest rate. (anonymous, long-run relation between interest rates and inflation,

More about Fisher Effect Case Study

Open Document