In countries with hyperinflation, the government prints money an uses it to pay government workers. How is this similar to counterfeiting? How is it different? The Fisher effect says that nominal...

In countries with hyperinflation, the government prints money an uses it to pay government workers. How is this similar to counterfeiting? How is it different? The Fisher effect says that nominal interest rates will equal expected inflation plus the real equilibrium rate of return:

Economists an Wall Street experts often use the Fisher effect to learn about economic variables that are hard to measure because when the Fisher effect holds, if we know any two of the three items in the equation, we can calculate the third. Sometimes, for example, economists are trying to estimate what investors expect inflation is going to be over the next few years, but they only have good estimates of nominal interest rates an the equilibrium real rate. Other times, they have good estimates of expected inflation an today’s nominal interest rates, an want to learn about the equilibrium real rate. Let’s use the Fisher effect just like the experts do: Use two known values to learn about the unknown third one

Note: The last entry is an example of the “Friedman rule,” something that we’ll come back to in a later chapter.