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The Fisher Effect

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The Fisher Effect
The Fisher Effect
The Fisher effect states that, in response to a change in the money supply, the nominal interest rate changes in tandem with changes in the inflation rate in the long run. For example, if monetary policy were to cause inflation to increase by 5 percentage points, the nominal interest rate in the economy would eventually also increase by 5 percentage points.

In order to understand the Fisher effect, it's crucial to understand the concepts of nominal and real interest rates.

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