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Oct 2, 2007

Fisher Equation - Real & Nominal Interest Rate under Inflation

Equation was derived by Irving Fisher
Effect of inflation on interest rates

Let
Rn = Nominal Rate of Interest
Rr = Real Rate of Interest
Ri = Expected Rate of Inflation.
The above rates are in terms of per $ (not %); then according to Fisher

(1+Rn)=(1+Rr)(1+Ri)

which can be approximated as
Rn = Rr + Ri , since interest rates are quite less than 1.

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