1. What is Expected Real Interest Rate?

The expected real interest rate is the nominal interest rate minus the expected inflation rate. It represents the true cost of borrowing or the real return on savings after accounting for the expected loss of purchasing power due to inflation.

2. How Does the Calculator Work?

The calculator uses the Fisher equation simplified form:

Where:

• \( \text{Nominal} \) — Stated interest rate (%)
• \( \text{Expected Inflation} \) — Anticipated inflation rate (%)

Explanation: This formula provides an approximation of the real interest rate. For more precise calculation, especially with high inflation, the exact Fisher equation should be used.

3. Importance of Real Interest Rate

Details: Real interest rates are crucial for economic decisions as they reflect the true cost of borrowing and the real return on investments. Central banks monitor real rates when making monetary policy decisions.

4. Using the Calculator

Tips: Enter the nominal interest rate and expected inflation rate as percentages. Both values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between real and nominal rates?
A: Nominal rates don't account for inflation, while real rates do. Real rates show the actual purchasing power of interest payments.

Q2: Can real interest rates be negative?
A: Yes, when inflation is higher than nominal rates. This means money loses purchasing power even with interest.

Q3: Why use expected rather than actual inflation?
A: Because financial decisions are based on future expectations, not past inflation.

Q4: What's the exact Fisher equation?
A: \( (1 + \text{Nominal}) = (1 + \text{Real}) \times (1 + \text{Inflation}) \). Our calculator uses an approximation.

Q5: How do central banks use real rates?
A: They monitor real rates to assess whether monetary policy is expansionary (low/negative real rates) or contractionary.