The Fisher Equation

The Fisher Equation is an important financial concept that describes the relationship between nominal interest rates, real interest rates, and inflation. It states that the nominal interest rate (the stated rate without inflation) equals the real interest rate (the rate adjusted for inflation) plus the expected inflation rate. In simple terms, it helps investors understand how inflation affects the returns on their investments. For example, if inflation is high, the actual purchasing power of money earned from interest may be lower, which is crucial for making informed financial decisions.