1. What is the Fisher hypothesis? Is it Valid? Explain The Fisher hypothesis (sometimes called the Fisher effect) is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, specifically the nominal interest rate and the expected inflation rate. The term "nominal interest rate" refers to the actual interest rate giving the amount by which a number of shillings owed by a borrower to a lender grows over time; the term "real interest rate" refers to the amount by which the purchasing power of those shillings grows over time—that is, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the loan proceeds.
The relation between the nominal and real rates is given by the Fisher equation, which is

This states that the real interest rate () equals the nominal interest rate () minus the expected inflation rate (). Here all the rates are continuously compounded. For rates based on simple interest, the Fisher equation takes the form

where is the simple nominal interest rate and is the simple real interest rate; this equation is well approximated by using the simple rates in the previous equation provided all three percentage rates are relatively small.
If the real rate is assumed, as per the Fisher hypothesis, to be constant, the nominal rate must change point-for-point when rises or falls. Thus, the Fisher effect states that there will be a one-for-one adjustment of the nominal interest rate to the expected inflation rate. The implication of the conjectured constant real rate is that monetary events such as monetary policy actions will have no effect on the real economy—for example, no effect on real spending by consumers on consumer durables and by businesses on machinery and equipment.
It is valid as it is an important tool by which lenders can gauge whether