Question

Can you explain how the fisher effect theory affect GDP in relation to inflation?

Can you explain how the fisher effect theory affect GDP in relation to inflation?

Homework Answers

Answer #1

The Fisher effect indeed gets to tell that the real interest rate equals the difference between nominal.interest rate and inflation where consider the nominal interest rate is constant and the inflation rises with which the real interest rate falls. The fall in the interest rate is a sign of decrease in GDP of negative economic growth and similarly if the inflation decreases there is a rise in the real interest rates and this is a sign of increase in GDP on the whole.

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