Quantity Theory and Fisher Equation - how money growth affects the nominal interest rate

r = i − p

i denotes the nominal interest rate, 

r the real interest rate, 

p the rate of inflation

Fisher equation

i = r + p

It shows that the nominal interest rate can change for two reasons: because the real interest rate changes or because the inflation rate changes.

The quantity theory of money shows that the rate of money growth

determines the rate of inflation. 

The Fisher equation then tells us to add the real interest rate and the inflation rate together to determine the nominal interest rate.

The quantity theory and the Fisher equation together tell us how money growth affects the nominal interest rate. 

According to the quantity theory, an increase in the rate of money growth of 1 percent  causes a 1 percent increase in the rate of inflation.

According to the Fisher equation, a 1 percent increase in the rate of inflation in turn causes a 1 percent increase in the nominal interest rate. 

The one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect.