What is the Fisher Effect? Provide an example. What will be an ideal

What is the Fisher Effect? Provide an example.

What will be an ideal response?

ANSWER

All else equal, a rise in a country’s expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. Similarly, a fall in the expected inflation rate will eventually cause a fall in the interest rate.
Ex: If the expected U.S. inflation were to rise permanently from Π to Π + ΔΠ, current dollar interest rates R$ would eventually catch up to the higher inflation, rising by a value ΔR$ = ΔΠ in accordance with the Monetary Approach that in the long run purely monetary developments should have no effect on an economy’s relative prices since the real rate of return on dollar assets would remain unchanged.