THE FISHER EFFECT

According to the principle of monetary neutrality, an increase in the rate of money growth raises the rate of inflation but does not affect any real variable. An important application of this principle concerns the effect of money on interest rates. Interest rates are important variables for macro economists to understand because (they link the economy of the present and the economy of the future through their effects on saving and investment.

To understand the relationship between money, inflation, and interest rates, recall between the nominal interest rate and the real interest rate. The nominal interest rate is hear about at your bank. If YO!! have a savings account, for instance, the nominal in fast the number of dollars in your account will rise over time.