Wize AP Macroeconomics Textbook > Money and Prices in the Long Run

Fisher Effect

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Fisher Effect
The Fisher Effect tells us about the adjustment of the nominal interest rate to the expected inflation rate. 

Real Interest = Nominal Interest - Expected Inflation \boxed{\text{Real Interest = Nominal Interest - Expected Inflation }}Real Interest = Nominal Interest - Expected Inflation ​

Example: If expected inflation increases the real interest decreases
 . This is bad
 for lenders and good
 for borrowers. This will put pressure for the nominal interest to increase