FisherEquation

 

Dear Ig Norant,

First of all, the Fisher Equation is not anything related to fishing. It is named after economist Irving Fisher and it relates inflation to interest rates. Simply put, real interest rate is equal to nominal interest rate minus inflation rate (or alternatively, nominal interest equals real interest plus inflation                 ). To clarify, nominal interest rate is the interest rate calculated before inflation is considered. Real interest rate then is the rate after inflation, which results in the TRUE cost of borrowing dictated by the money market which encompasses the supply and demand for loanable funds. For example, if the nominal interest rate is 5% while inflation is 4%, the real interest rate would be 1% which is the real cost of borrowing funds.