Fisher Effect on Interest Rates

1. First

1.1. they compensate for a saver's reduced purchasing power

2. Second

2.1. they offer an additional premium to savers for foregoing present consumption. ( Savers are willing to forgo consumption only if they receive a premium on their savings above the anticipated rate of inflation

3. 1-The relationship

3.1. between interest rate and expected inflation is referred to Fisher effect.

4. 2-The difference

4.1. between the nominal interest rate and the expected inflation rate is the real return to a saver after adjusting make to the reduced purchasing power over the concerned period of time

4.2. If the nominal interest rate is equal to the expected inflation rate, then the real interest rate would be zero.

4.3. If the inflation rate is higher than predictable, the real interest rate is relatively low and vice versa

5. The Formula

5.1. Exact Formula Real Interest

5.1.1. = (1+Nominal Interest Rate)- 1 (1+Inflation Rate)

5.2. Exact Formula Nominal Rate

5.2.1. (1+Real Interest) x (1+Inflation Rate) -1

5.3. Approximation Formula Real Interest Rate

5.3.1. Nominal Rate – Inflation Rate

5.4. Approximation Formula Nominal Rate

5.4.1. Real Interest Rate + Inflation Rate