Fisher Equation Calculator
Calculate the real interest rate using the Fisher Equation. By inputting the nominal interest rate and the inflation rate, you can determine the real interest rate. The Fisher Equation is used to adjust the nominal interest rate for inflation, providing a measure of the true purchasing power of the interest earned or paid.
Real Interest Rate = ((1 + Nominal Interest Rate) / (1 + Inflation Rate)) − 1
What is the Fisher Equation?
The Fisher Equation was first proposed by American economist Irving Fisher. It represents an economics concept that is used to delineate the relationship between the real and nominal interest rates in the presence of inflation. According to the equation, the nominal interest rate equals the total of the real interest rate added to inflation.
The Fisher equation is frequently used when lenders or investors seek an additional reward to compensate for any losses in purchasing power they encounter as a result of an increase in inflation.
It is also commonly employed within the disciplines of economics and finance; for example, it may be used to forecast real and nominal interest rate patterns or compute the returns on investment.
The Fisher equation has proven to be useful within the area of monetary policy. The application of the Fisher equation proves that monetary policy can move nominal interest rates and inflation in the same direction. However, it does not influence the real interest rate.
Fisher Equation Formula
The Fisher equation is as follows:
(1 + i) = (1 + r) (1 + π)
i = nominal interest rate,
r = real interest rate,
π = inflation rate.
The formula can be approximated as follows:
i ≈ r + π
Fisher Equation Calculator example
Certainly! Here's an example of using a table to calculate the nominal interest rate, inflation rate, and real interest rate using the Fisher equation:
|Year||Nominal Interest Rate||Inflation Rate||Real Interest Rate|
In this example, we have three different years with their respective nominal interest rate and inflation rate. We also calculate the real interest rate for each year using the Fisher equation.
To calculate the real interest rate using the Fisher equation, you can use the formula:
Real Interest Rate = Nominal Interest Rate - Inflation Rate
For instance, in 2021 with a nominal interest rate of 5% and an inflation rate of 2%, the real interest rate would be 2.94%.
Similarly, using the same formula, you can calculate the real interest rates for 2022 and 2023 based on their respective nominal interest rates and inflation rates mentioned in the table.
The Fisher equation helps us understand the relationship between the nominal interest rate, inflation rate, and real interest rate. It states that the real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate represents the purchasing power of an individual's savings or investments after taking into account the effects of inflation. Comparing the real interest rates over different periods can provide insights into the changes in purchasing power and the attractiveness of investment opportunities.