1. What is the Fisher Effect?

The Fisher Effect describes the relationship between nominal interest rates, real interest rates, and inflation. It states that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate.

2. How Does the Calculator Work?

The calculator uses the Fisher equation:

Where:

• \( i \) — Nominal interest rate
• \( r \) — Real interest rate
• \( \pi \) — Inflation rate

Explanation: The equation shows that money's real purchasing power grows at the real interest rate, while nominal rates account for both real growth and inflation.

3. Importance of the Fisher Effect

Details: The Fisher Effect is crucial for understanding how inflation affects interest rates, investment decisions, and monetary policy. It helps distinguish between nominal and real returns.

4. Using the Calculator

Tips: Enter any two of the three values (nominal rate, real rate, or inflation rate) to calculate the third. All values should be in percentage terms.

5. Frequently Asked Questions (FAQ)

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

Q2: Does the Fisher Effect always hold true?
A: It holds in the long run but may not in the short term due to market imperfections and monetary policy.

Q3: How does this affect my savings?
A: If inflation is higher than your nominal interest rate, your real return is negative - you're losing purchasing power.

Q4: What's the simplified Fisher equation?
A: For low inflation rates, it can be approximated as: nominal rate ≈ real rate + inflation rate.

Q5: Why use the exact equation instead of the approximation?
A: The exact equation is more accurate, especially with higher inflation rates or when compounding is considered.