Q:

What is the Fisher equation?

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Quick Answer

The Fisher equation states that the real interest rate equals the nominal interest rate minus the inflation rate. It is named for the economist Irving Fisher and gives a clearer picture of interest rates by taking the effect that inflation has on purchasing power into account.

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Full Answer

As an example, if a bank offers an annual nominal interest rate of 10 percent on a savings account, that account will have 10 percent more money in it after a year. If the inflation rate for that year is 8 percent, then the true picture of how much interest the savings account earns is closer to 2 percent, since 10 minus 8 equals 2; this is the real interest rate.

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