Fisher Effect
said that the interest rate we pay are based on 2 things; the the real interest rate and anticipated inflation. Nominal interest (amount we pay)= real interest rate (bank earns) + Anticipated inflation
5%= 2%+ 3%
Prices go up = interest rates go up If inflation is high we expect more inflation so lenders raise the nominal interest rate to keep the buying power the same and borrowers are willing to pay higher interest rate to compensate the lender for the decrease/loss in value during the time the money is on loan.
Stephanie Powers, "Economic Growth", Donald School of Business, Winter 2012
said that the interest rate we pay are based on 2 things; the the real interest rate and anticipated inflation.
Nominal interest (amount we pay)= real interest rate (bank earns) + Anticipated inflation
5%= 2%+ 3%
Prices go up = interest rates go up
If inflation is high we expect more inflation so lenders raise the nominal interest rate to keep the buying power the same and borrowers are willing to pay higher interest rate to compensate the lender for the decrease/loss in value during the time the money is on loan.
Stephanie Powers, "Economic Growth", Donald School of Business, Winter 2012