Fisher effect

In this lesson

1. 0:00 The Fisher Effect explained
2. 2:01 Nominal rates versus real returns
3. 3:23 Fisher Effect formula breakdown
4. 4:36 Calculating nominal rate from real rate
5. 6:07 Working backwards to find real rate
6. 8:50 Key takeaways and summary

About this lesson

This 9-minute lesson breaks down the relationship between interest rates and inflation using practical examples, then walks you through the Fisher effect formula and two types of exam calculations: finding the nominal rate when you know the real rate and inflation, and working backwards to find the real rate. By the end, you'll be confident using this formula to solve investment and financing problems in your exams. The Fisher effect explains that the nominal interest rate you receive is actually made up of two components: the genuine return (real rate) and compensation for inflation. The video uses a relatable example—investing a £100 bonus at 10% interest in an environment with 10% inflation—to show why the real return matters more than the headline rate. You'll see how to rearrange the formula one plus nominal rate equals one plus real rate times one plus inflation rate to solve different question types, with worked examples showing each step clearly.

Duration: 9m